Spring forward: 5 themes for the coming months

Chris explores five themes to keep investors springing forward, rather than falling back this season.

Tired of winter? Never fear: Once again, spring is near. For all of us, it is a time of growth, renewal and restoration. For investors it is also time to take stock of whether they are on course, or to identify potential storms that may lie ahead.

Although markets in 2019 have enjoyed a healthy start to the year, concerns over slowing growth, economic and earnings outlooks, and U.S.-China and European political risks are ever-present. As the iShares Investment Strategy team discusses in the Spring Investment Directions, investors should begin to consider defensive exposures.

Our take on the five major themes for this quarter:

1. In U.S. equities consider the healthy healthcare sector.

In an environment of slowing growth and less certain earnings outlooks, the resilient earnings growth of healthcare stocks are appealing. Plus, valuations broadly look reasonable compared to historical levels. Tactical investors may consider getting more granular by focusing on exposure to the medical devices industry.Relative value: Trailing 12-month earnings per share

2. As leaders decide what’s next for Brexit, stay underweight U.K. and European stocks.

With Theresa May’s Brexit plan resoundingly defeated, she must now renegotiate a deal. We believe the United Kingdom is likely to avoid a hard exit with an extension of the March 29 deadline to exit and gain time to draft a passable proposal. But lingering uncertainty is likely to keep U.K. assets under pressure while a deeper slowdown in European and global growth only accentuates the challenges. We remain underweight U.K. and European equities.

3. Despite a bad 2018, China is looking ahead.

Although Chinese equities tumbled in 2018, we continue to favor China as well as emerging markets overall. Although trade tensions are likely to persist, we believe frictions will subside in the short run. And we find trade tensions are reasonably priced into Chinese equities. Meanwhile, accommodative policy measures and sustained earnings growth in China could lift investor sentiment.

4. Remember: Ballast matters with bonds.

In 2018, investors were rightly concerned about duration risk as interest rates rose due to Fed tightening, inflation fears and rising deficits. But during December’s equity sell-off, yields fell—long-duration U.S. Treasuries (as measured by the ICE U.S. Treasury 20+ Year Index) returned +5.6% [1]—a stark reminder of the key role bonds can play as a diversifier in a portfolio. We favor holding long duration Treasuries and highly rated investment grade bonds for this purpose.

5. Factors: Momentum on defense, quality is diverging.

Our outlook for momentum has declined to a moderate overweight; it remains attractive, but its relative strength has markedly weakened from the strong levels seen since fourth quarter 2016. Our outlook for minimum volatility has improved from moderately underweight to moderately overweight this quarter and we have downgraded quality from moderately overweight back to neutral. We remain neutral on value, and underweight size.

Funds to consider

iShares U.S. Healthcare ETF (IYH)

iShares U.S. Medical Devices ETF (IHI)

iShares MSCI United Kingdom ETF (EWU)

iShares China Large-Cap ETF (FXI)

iShares MSCI China ETF (MCHI)

iShares 20+ Year Treasury Bond ETF (TLT)

iShares Long-term Corporate Bond (IGLB)

iShares Edge MSCI USA Momentum Factor ETF (MTUM)

iShares Edge MSCI USA Quality Factor (QUAL)

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

1) Source: Bloomberg. As of February 15, 2019.

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.

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.

An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency and its return and yield will fluctuate with market conditions.

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. The iShares Minimum Volatility Funds may experience more than minimum volatility as there is no guarantee that the underlying index’s strategy of seeking to lower volatility will be successful.

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.

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