A different approach to risk taking

Investor risk appetite appears dented but not broken. The story is more about a rotation of positioning, and we see a conducive backdrop for risk taking ahead. Richard explains.

Record-setting equity inflows in January lost steam after the February market rout and double-whammy of trade tensions and tech worries since. Yet investors appear to be revising their risk exposures rather than abandoning risk entirely. We see a conducive backdrop for risk taking ahead, despite higher economic uncertainty.


Investors’ appetite for risk assets has been dented of late but looks to be generally holding up. The story is more about a rotation of positioning, we believe, based on our observation of EPFR fund flow data. U.S. equities gave back their sizeable January inflows, but flows into non-U.S. developed market and emerging market (EM) equities have more than offset the loss. See the chart above. In fixed income, high yield funds have bled assets, while U.S. investment grade, EM debt and U.S. government bonds have attracted inflows.

icon-pointer.svg Listen to Richard on the shift from global to domestic in our latest podcast.

A conducive backdrop

Markets have been choppy in 2018 and gauges from our Systematic Active Equity team suggest investor appetite for risk has faded somewhat. Yet we see the supportive economic and earnings backdrop underpinning the reward for risk. The BlackRock Growth GPS shows a sustained global economic expansion, even amid recent economic data disappointments. The tax overhaul has juiced the U.S. corporate earnings outlook — and earnings momentum is rising across the world. We expect a mostly solid first-quarter U.S. earnings season will help support stocks, easing some of the negative pressure from concerns about trade tensions and economic deceleration.

This backdrop should support risk assets, even as we expect more muted returns and higher volatility than in 2017. Key risks this year to the global expansion and risk assets – including the risk of a full-blown U.S.-China trade war, which we see as unlikely – have added uncertainty to the economic outlook. This uncertainty is behind the recent rise in risk premiums. See our Q2 Global Investment Outlook.

Where should investors consider taking risk?

We believe equities offer better compensation relative to credit. We are negative on government bonds but see short-maturity Treasuries offering a compelling risk/reward proposition. See our latest Fixed income strategy piece. We are neutral on U.S. credit amid tight spreads and increasing sensitivity to rate rises, while we are negative on European credit.

Within equities, we prefer the U.S. and EMs, as well as technology, financials and the momentum style factor. Flows and our proprietary data on investor positioning show U.S. equities have taken a particularly hard hit since January, suggesting some room for a rebound. Investors seeking to play defense in equities should look to companies with strong free cash flow and the ability to boost dividends rather than seek high dividends alone, we believe. See our April 2018 Global equity outlook, and read more market insights in our Weekly commentary.

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

In the latest episode of The Bid podcast, Richard Turnill discusses the shift in momentum from global to domestic, and what this might mean for markets.

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