5 ways to help navigate choppy markets

Five themes to monitor as market volatility picks up.

The recent burst of volatility has been unnerving, and has left many investors wondering what to do now. While it may be tempting to head for the exits, BlackRock’s Global Chief Investment Strategist Richard Turnill notes that investors should consider staying the course—and even look to take advantage of the selloff to add to positions. It is important to remember that the macro environment remains solid, and the market volatility is so far largely contained to equities. Although some are concerned about potential inflation and higher interest rates, we still enjoy an environment of synchronized global economic growth and muted macro risks.

All of this has created some interesting nuances—and challenges—for investors. As the U.S. ETF Investment Strategy team discuss in the new Investment Directions, here are five ways to help navigate the current environment.

Watch the yield curve

The shape of the yield curve can be a barometer for future growth, but its shape depends on a number of factors. Last year, it was relatively flat—often a sign of impending recession—but in this instance it’s a result of higher short-term rates with expectations of Federal Reserve tightening. The curve began steepening late in the year with expectations of stronger growth. We do not believe that is likely to change soon and the steeping yield curve indicates continued expansion. We maintain our preference for cyclicals, namely financials and technology, within the equity market.

Keep an eye out for the specter of trade wars

The greatest risk to the markets right now may actually be the potential for increased protectionism. Worries over trade frequently made headlines in 2017, but mostly was in the form of rhetoric. Investors may be discounting the risk that will change—and should evaluate whether their portfolios are actually exposed to risks from rising protectionism, particularly with respect to NAFTA and China.

icon-pointer.svg Get some direction from the latest Investment Directions.

Look overseas in emerging markets (EMs) for opportunities

During this recent market selloff, it might come as a surprise that EM equities have held up relatively well—actually outperforming U.S. equities during this leg lower, based on the performance of the S&P 500 Index and the MSCI Emerging Markets Index from 26 January to 8 February 2018, according to Bloomberg. Within EMs, we are monitoring an interesting development: the rise in commodity prices in recent months that has historically resulted in a rally in EM commodity producers. Although EMs as a whole has performed well, it is the non-commodity producers that have outperformed their commodity producing counterparts, as domestic growth and reform efforts are prevailing. We remain constructive on China, India, Indonesia and Brazil—only the latter is a commodity producer. (Based on the respective MSCI EM indexes, from 1 January 2017 to 31 January 2018, according to Bloomberg. Commodity countries include Brazil, Chile, Colombia, Malaysia, Mexico, Peru, Russia and South Africa. Non-commodity countries include China, India, Indonesia, South Korea, Philippines, Poland, Taiwan, Thailand and Turkey. Source: BlackRock.)

Consider mortgages as a fixed income diversifier

The yield on the 10-year Treasury note has crested 2.80%, as of 12 February 2018 according to Bloomberg, but we believe that rates will grind, not spike, higher. While higher rates may cause investors to reconsider their bond allocations, they may provide relatively stable income and act as a diversifier in times of market stress. One potential solution: consider agency mortgage-backed securities, which can offer value relative to other high grade securities.

Consider factor strategies

Finally, investors should consider diversifying using factor strategies, which historically have had relatively low correlations with each other, and lower than sectors and single stocks have with each other.

Funds to consider

iShares U.S. Financials ETF (IYF)

iShares U.S. Technology ETF (IYW)

iShares MSCI China ETF (MCHI)

iShares MSCI India ETF (INDA)

iShares MBS ETF (MBB)

iShares Edge MSCI USA Size Factor ETF (SIZE)

iShares Edge MSCI USA Value Factor ETF (VLUE)

Chris Dhanraj is the Head of the ETF Investment Strategy team in iShares and a regular contributor to The Blog.

Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

Index performance is for illustrative purposes only.  Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

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. Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.

Mortgage-backed securities (“MBS”) and commercial mortgage-backed securities (“CMBS”) are subject to prepayment and extension risk and therefore react differently to changes in interest rates than other bonds. Small movements in interest rates may quickly and significantly reduce the value of certain mortgage-backed securities.

Funds that concentrate investments in specific industries, sectors, markets or asset classes may underperform or be more volatile than other industries, sectors, markets or asset classes and than the general securities market.

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets or in concentrations of single countries.

There can be no assurance that performance will be enhanced or risk will be reduced for funds that seek to provide exposure to certain quantitative investment characteristics (“factors”). Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods. In such circumstances, a fund may seek to maintain exposure to the targeted investment factors and not adjust to target different factors, which could result in losses.

When comparing stocks or bonds and iShares Funds, it should be remembered that management fees associated with fund investments, like iShares Funds, are not borne by investors in individual stocks or bonds.

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 the date indicated 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 of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective. The information presented does not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy or investment decision.

This post contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

The iShares Funds are not sponsored, endorsed, issued, sold or promoted by MSCI Inc., nor does this company make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with MSCI Inc.

©2018 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

424994