Positioning portfolios for 2017

We see accelerating global reflation ahead, a theme central to how we suggest positioning portfolios for 2017. Richard explains, with the help of this week's chart.

We see reflation—rising nominal growth, wages and inflation—accelerating globally in 2017, led by the U.S. This theme is central to how we suggest positioning portfolios for the coming year, including our preference for value shares over bond proxies, as this week’s chart helps explain.


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With inflation taking root and growth picking up, we believe bond yields have bottomed, and yield curves are likely to steepen further in 2017. This environment should support reflationary beneficiaries, such as value stocks. Higher long-term rates drove a rotation within equities during the second half of 2016. Reflation contributed to value shares outperforming the broader market, as bond-like equities suffered.

Stocks over bonds

We expect more of this rotation in 2017, and see the stock market beneficiaries of the post-crisis low-rate environment further underperforming over the medium term. We generally prefer stocks over bonds and are optimistic about further upward revisions to earnings estimates. Within equities, we favor U.S. regional banks, selected health care stocks and companies able to expand their dividend payouts over time. Our research suggests dividend growers perform well when inflation drives rates higher.

On a regional basis, we have upgraded our views of Europe to neutral and Japan to overweight. Weaker currencies should support these markets, though we are wary of political, policy and trade risks in the eurozone. We favor emerging market (EM) equities, given structural reforms, improving profitability and low valuations. A sharp rally in the U.S. dollar or significant changes to trade agreements are risks, however. We see earnings growth and further rotation into big sectors such as financials underpinning a U.S. market advance in 2017, but we are cautious in the near term after large inflows and new record highs.

Within fixed income, a reflationary outlook challenges longer-term bonds. We favor shorter-duration bonds given their lower sensitivity to rising rates. We see stronger growth supporting credit over government bonds, and we have a long-term preference for inflation-linked securities over nominal debt. Read more market insights in our 2017 Outlook and Weekly Commentary.

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

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.

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 January 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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