6 investing ideas to consider now

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It’s not too late to prepare portfolios for the remainder of 2017. Richard shares some investing ideas to consider now.

The year is drawing to a close, with the fourth quarter officially here. Yet it’s not too late to prepare portfolios for the remainder of 2017, as we write in our Global Investment Outlook Q4 2017.

We see three key interrelated themes shaping economies and markets over the next three months: sustained global economic expansion and the need to rethink both returns and risk. How should investors prepare portfolios for this environment? Here’s a quick look at six investing ideas to consider now.

Favor equities over fixed income, and think globally

Steady economic expansion and strong earnings growth bode well for equities. The sustained global expansion is providing a positive backdrop for corporate earnings. Earnings are growing at a faster than 10% pace in all major regions for the first time since 2005, excluding the post-crisis bounce, our research shows. We favor non-U.S. markets, including Europe and Japan, and we are bullish on emerging market (EM) stocks, even after a strong rally this year. Europe is sustaining above-trend economic expansion. Japan has seen a jump in earnings expectations. And economic reform momentum, improving cash flows and reasonable valuations make a solid investment case for EM equities.

Consider sectors like tech, U.S. banks

This year’s top sector also holds appeal: Tech has posted outsized earnings growth and accounted for roughly half of U.S. and EM Asia equity returns. We still see ample runway, as outlined in our post on Why the tech sector glass is half full. We also like U.S. bank stocks, with steeper yield curves set to boost lending margins, and prospects for deregulation and increased payouts.

Don’t forget about factors

We particularly like the momentum and value equity style factors. Momentum in developed markets has more upside potential, we believe, as it tends to do well in expansionary periods. And value could benefit amid a solid macro backdrop and improved investor sentiment. Caution has kept investors away from discounted segments of the market. But a sentiment shift, underpinned by confidence in the sustained global expansion, could help value add to strong third-quarter returns, we believe.

Look to credit for income in a low-yield world

Yes, credit spreads are close to historically tight levels. Yet we believe credit is an attractive source of income—and one seeing persistent demand in the context of a low-yield fixed income universe. Today’s valuations imply future returns will come from clipping coupons (carry) rather than tightening spreads. As a result, we believe credit offers less upside than equities on a risk-adjusted basis if our scenario of sustained global expansion pans out. But this environment of low market and economic volatility is one where corporate defaults are expected to be limited. In the U.S., we prefer an up-in-quality stance. In Europe, we like earning spread in supranational, covered and subordinated financial bonds.

Embrace opportunities in EM debt

We like selected EM debt for income and potential price appreciation amid low inflation and subdued currency volatility in the emerging world. EM debt also gleans support from synchronized global growth, buoyant commodity prices and global investor thirst for yield. Unlike developed market (DM) central banks, many EM counterparts have room to cut rates given a backdrop of steady growth and subdued inflation. This should lead to a further narrowing of interest rate differentials versus the rest of the world as the Federal Reserve leads its DM peers in normalization. We expect relative price outperformance in EM debt as a result.

Stronger EM currencies have boosted the performance of EM local-currency debt this year. We see the U.S. dollar appreciating only modestly and gradually—and not diluting the EM investment case. So what are the main risks? A stalling of global growth momentum, a yield spike caused by slowing monetary stimulus, or a rapidly resurging dollar.

Consider government bonds for ballast

We expect interest rates to rise, as U.S. and eurozone monetary policies gradually normalize, though structural factors and further central bank divergence are likely to keep a lid on rates. The implications of moderately higher rates: Expect low or negative returns for government bonds globally in the medium term. Yet long-term government bonds are useful diversifiers against volatility and equity market selloffs sparked by geopolitical risks. We advocate a strategic allocation to government bonds, despite their low potential returns, for this reason. Read more, including our detailed market views, in the full Global Investment Outlook Q4 2017.

Richard Turnill is BlackRock’s global chief investment strategist. He is a regular contributor to The Blog.

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Investing involves risks, including possible loss of principal. International investing involves special risks including, but not limited to currency fluctuations, illiquidity and volatility. These risks may be heightened for investments in emerging markets. Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of October 2017 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

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