BlackRock highlights six portfolio ideas for global growth

Nov 21st, 2017 | By | Category: Alternatives / Multi-Asset

Wei Li, head of iShares EMEA investment strategy at giant ETF issuer BlackRock, has commented on six potential ideas for investors’ portfolio allocations amidst increasing global economic expansion.

Wei Li, head of iShares EMEA investment strategy at BlackRock

Wei Li, head of iShares EMEA investment strategy at BlackRock.

According to Li, roughly three-quarters of countries are clocking up growth – a first since the financial crisis – and China’s growth has surprised to the upside this year. “Overall, we see no change to the big picture of a global expansion chugging along at an above-trend pace.” Commenting on what this trend means for investors, Li noted, “Inflation is key to the policy and market outlook. Our BlackRock Inflation GPS suggests US core inflation will rise back towards 2%, giving the Federal Reserve comfort in pushing ahead with policy normalisation. By contrast, we see core eurozone inflation stuck at much lower levels.”

European equities

“We see sustained above-trend economic expansion and a steady earnings outlook supporting cyclicals,” said Li. “Eurozone companies with much of their cost base overseas should have some cover against a strong euro in the short term.”

Broad exposure to European large- and mid-caps may be obtained through the iShares MSCI Europe UCITS ETF (IMEU LN) which has a total expense ratio (TER) of 0.35% and assets under management (AUM) of €5.0 billion.

Those looking for a more targeted play on the cyclical sectors within Europe may be interested in BlackRock’s range of equity sector ETFs. The sectors usually associated with cyclical characteristics include basic materials, consumer discretionary, and financials: these may be accessed through the iShares Stoxx Europe 600 Basic Resources UCITS ETF (EXV6 GY) (TER: 0.46%; AUM: €520m); iShares Stoxx Europe 600 Travel & Leisure UCITS ETF (EXVP GY) (TER: 0.46; AUM: €28m); and iShares Stoxx Europe 600 Financial Services UCITS ETF (EXH2 GY) (TER: 0.46%; AUM: €30m) respectively.

Japanese equities

“Japanese equities remain attractively valued following a strong earnings season in which Japanese companies posted earnings-per-share growth of 22% versus 9% in the US and 13% in Europe,” said Li. “We see Bank of Japan policy and domestic investor buying as supportive, while the yen strength is a risk.”

The iShares Core MSCI Japan IMI UCITS ETF (SJPA LN) is part of BlackRock’s low-cost ‘core’ ETF range, providing diversified exposure to over 1,200 large-, mid-, and small-cap Japanese equities for a cost of 0.20%. The fund has AUM of $3.6bn.

Emerging market assets

“The MSCI EM Net Total Return USD Index has gained 28% year-to-date. Emerging market Asia is our favoured region within emerging market equities, partly because the MSCI Emerging Markets Asia Index is 38% tech at a sector level thanks to sizeable country exposures to South Korea and Taiwan,” commented Li. “Dollar-denominated emerging market debt looks cheap on a valuation basis relative to its own history and other fixed income assets, and it also offers comparable yield for a higher average credit rating than dollar-denominated high yield, albeit with higher average duration.”

The iShares Core MSCI EM IMI UCITS ETF (EIMI LN) provides broad emerging markets exposure for a cost of 0.25%. Its AUM is $7.9bn.

Those who wish to play a potential future appreciation in the emerging markets Asia technology sector can gain exposure to the aforementioned MSCI Emerging Markets Asia Index through the iShares MSCI EM Asia UCITS ETF (CEMA LN). The fund is a bit pricier than many iShares equity ETFs at a TER of 0.65%, but has AUM of over $460m.

The performance of dollar-denominated emerging market debt can be accessed through the iShares JP Morgan $ EM Bond UCITS ETF (IEMB LN), which targets government and quasi-government bonds only. IEMB has $7.9bn in AUM and a TER of 0.45%.

Fixed income: Inflation and interest rate linked bonds

Noting that a sustained economic expansion challenges nominal bonds, Li favours treasury inflation-protected securities (TIPS) “for the long run after valuations cheapened amid weaker inflation readings.” She continued, “We also like floating-rate bond exposures, on the basis that the Fed ‘dot plot’ points to one additional rate increase this year and another three hikes in 2018.”

BlackRock offers TIPS exposure through the iShares $ TIPS UCITS ETF (ITPS LN) which provides direct investment in US inflation-linked government bonds from across the maturity curve. ITPS costs 0.25% and has AUM of $2.3bn.

The iShares $ Floating Rate Bond UCITS ETF (FLOT LN) provides access to dollar-denominated floating rate bonds, whose interest payments adjust to reflect changes in interest rates. The fund is relatively new, having launched in July 2017. It has $120m in AUM and a TER of just 0.10%.

Sector favourites

“This year’s best-performing sector so far still holds appeal,” said Li. “Tech has posted outsized earnings growth and accounts for roughly half of US and EM Asia equity returns, but we still see ample runway. Tech firms’ balance sheet cash potentially offers some cushion against rising rates and the sector could stand to benefit from any repatriation of cash held overseas should US tax reforms incentivise doing so.”

Investors wishing to bet that the US technology sector continues to outperform may consider the iShares S&P 500 Information Technology Sector UCITS ETF (IUIT LN). The fund tracks S&P 500 companies from within the information technology sector (as defined by the Global Industry Classification Standard). Its TER is 0.15% and the fund has AUM of $407m.

Factor investing

Turning to factor investing, Li noted that the momentum factor has performed well this year with many US and global stocks with strong price momentum posting double-digit gains. “Our outlook for a steady, sustained expansion suggests momentum should remain in the lead,” said Li. “The MSCI USA Momentum Index also has relatively high weightings to our preferred tech and financials sectors.”

Investors can track the MSCI USA Momentum Index through the iShares Edge MSCI USA Momentum Factor UCITS ETF (IUMO LN), which has a TER of 0.20% and AUM of $16m.

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