Pressure drop: 5 investing themes for winter

As we head towards the final weeks of 2019, Chris discusses some ways to navigate markets.

“Pressure Drop,” the classic Toots and the Maytals song, comes to mind as we see a de-escalation in trade tensions with China, diminishing risks of a no-deal Brexit and few signs that the record U.S. economic expansion is ending or reversing. Still, persistent trade uncertainty is denting business confidence and spending, particularly the longer-term risk of an unravelling of the global supply chain.

Against that backdrop, the iShares Investment Strategy team discusses five major investor themes for the weeks ahead in our latest publications, the Winter Investment Directions. Our take:

1. Within U.S. equities, be careful steering among defensive and cyclical sectors.

Defensive sectors have outperformed cyclicals this year against a backdrop of slowing growth and falling interest rates. However, we expect central bank easing could provide a floor for growth in the coming months. Among cyclicals, we remain constructive on technology, while we prefer less rate-sensitive sectors such as healthcare among defensives.

2. Among developed markets, a bottoming of the growth slowdown may help, but we still see a winter of discontent.

Trade uncertainties and slowing growth have taken a toll on developed world stocks outside the United States. But not all DMs are created equal, and there are signs that the global growth slowdown has hit bottom, while central bank easing could help. We are neutral on Europe and underweight Japan.

3. Although a trade truce helps China, the slowing growth outlook warrants a cautious approach.

A temporary trade truce with the United States provided some optimism around China over the last month. However, China’s growth slowdown has become more pronounced. Investors may want to consider EM ex-China exposures to hedge out the potential risks associated with a Chinese slowdown and any potential negative trade news.

4. Within fixed income, among the swings in yields consider seeking defense in investment grade credit.

U.S. government bond yields have responded to geopolitical risks over the past few months both ways, which underscores bonds’ important role as a diversifier. Meanwhile, investment grade credit continues to lead sectoral performance, supported by easing financial conditions, a still-growing domestic backdrop and investors seeking high-quality yield. An up-in quality approach may allay fears over potential downgrades.

5. The outlook for value has made it a candidate for the comeback king.

We remain in an unfavorable environment for value, given slower growth and the return of “lower-for-longer” interest rates. Still, our outlook for value has improved and now stands at a neutral position as relative valuations appear quite cheap. Our outlooks for minimum volatility and quality have similarly improved.

Related iShares Funds

iShares U.S. Technology ETF (IYW)

iShares Exponential Technologies ETF (XT)

iShares U.S. Healthcare ETF (IYH)

iShares MSCI Eurozone ETF (EZU)

iShares Core MSCI Europe ETF (IEUR)

iShares MSCI China ETF (MCHI)

iShares Core MSCI Emerging Markets ETF (IEMG)

iShares Broad USD Investment Grade Corporate Bond ETF (USIG)

iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)

iShares Edge MSCI USA Value Factor ETF (VLUE)

Chris Dhanraj is the Head of the iShares Investment Strategy team 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 un-managed and one cannot invest directly in an index. Past performance does not guarantee future results.

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.

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.. 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.

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. by Markit Indices Limited, nor do these companies make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with the companies listed above.

©2019 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.

ICRMH1119U-1017699-1/1