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Balancing risk and upside potential

October 11, 2019

Investors can prepare for higher volatility and still take advantage of opportunities.

U.S. stocks posted positive performance in September and have now delivered the best year-to-date returns since 1997. However, the spotlight is on expectations for returns going forward, as key economic data continues to weaken amid ongoing geopolitical tensions.

Recent data indicates the U.S. is not immune to the global weakening in manufacturing. U.S. factory activity contracted for two consecutive months and now sits at the lowest levels in over a decade. However, consumers globally remain resilient, especially in the U.S., where roughly two-thirds of the economy is consumer-driven, underpinning our base case that the expansion will be sustained. Thus, we modestly added market upside potential in the fund by purchasing equity call options, which appear attractive in this environment.

The European Central Bank cut interest rates in September and announced it is restarting its asset purchase program, while the Federal Reserve cut rates for the second time this year. We believe easing measures by central banks globally will help combat slowing growth, but ultimately, more coordinated and differentiated efforts, such as fiscal stimulus, may be necessary to fight the next major downturn. In the BlackRock Multi-Asset Income Fund, we continue to maintain a longer duration profile (interest rate sensitivity) in our fixed income allocation as a hedge against stock market volatility.

Geopolitical uncertainties continue to weigh on sentiment. Although concessions have been made recently, a meaningful trade deal between the U.S. and China is doubtful in the near-term. Brexit, while unlikely to rise to the level of a true global shock, remains a major risk for the UK and Europe. Meanwhile, in the U.S., impeachment inquiries against President Trump may cause worries among investors. Given the scale of these uncertainties and the significant appreciation in stock markets already this year, we believe it is best to hold a balanced risk profile while relying on carry (income generation) as a dependable source of returns.

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Michael Fredericks
Head of Income Investing for BlackRock Multi-Asset Strategies Team
Michael Fredericks, Managing Director, is head of Income Investing for the Blackrock Multi-Asset Strategies group and lead portfolio manager for the Multi-Asset Income, ...
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