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Russ Koesterich, CFA
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Russ Koesterich, CFA, is the Global Chief Investment Strategist for BlackRock's iShares ETF business. He is a founding member of the Blackrock Investment Institute, delivering BlackRock’s insights on global investment issues. During his 20+ year career as an investment researcher and strategist,... More
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iShares Blog - Global ETF Market Intelligence
My book:
The Ten Trillion Dollar Gamble: The Coming Deficit Debacle and How to Invest Now: How Deficit Economics Will Change our Global Financial Climate
  • Monday Market Calls | Overweight Healthcare and Exiting Australia 0 comments
    May 31, 2011 12:44 PM | about stocks: AXHE, EWA, IYH, IXJ

    Call #1: Overweight Healthcare
    This week, our attention turns to the recent slowdown in the global economy and what it means for investors.
    Over the past month, both equity and commodity markets have staged a modest retreat. A large part of the weakness can be attributed to the palpable slowdown in the global economy.
    One potential cause of the slowdown is the lagged impact of higher commodity prices, which have historically acted as a drag on growth. Over the past two years, industrial metal prices have more than doubled back to their 2008 peak. In addition, the recent spike in oil prices is further complicating the picture. Since the summer of 2009, oil prices have risen by approximately 65%, creating an additional drag on the discretionary purchases of lower-end consumers and on economic activity.
    In the United States, a moderation in government stimulus is also fueling a slowdown. First quarter US gross-domestic-product expanded at an anemic 1.8% annualized pace, down from 3.1% in the previous quarter. This does not appear to be a temporary blip. The Chicago Fed National Activity Index, an indicator that has been particularly accurate at forecasting economic growth, also fell sharply in April. While the current reading does not suggest a double-dip or contraction, it does indicate that second quarter growth is likely to be closer to 2% than to the 3% estimate the market is currently expecting.
    In addition, the weakness is not limited to the United States. Most economies – in both developed and emerging markets – are experiencing a similar deceleration. Particularly troubling has been the slowdown in China, until very recently the engine of global growth, as the government there tries to curtail inflation.
    While we do believe that this global slowdown represents a deceleration rather than a reversal of the global recovery, we believe investors should consider moderating their views on future growth and adopting a more defensive posture.
    From an investment standpoint, a slower global economy means slower earnings growth. While we still think the equity market can advance based on high margins, low interest rates and low inflation, the gains are likely to be slower in coming months and cyclical companies are likely to face more headwinds. As a result, we favor decreasing exposure to cyclical names and sectors and increasing allocation to more defensive sectors such as Healthcare, which we first talked about in this April blog post and also mentioned in our recent global sector commentary
    Call #2: Exit Overweight Australia 
    Late last year, we advocated an overweight to Australian equities, which we then reiterated in early April. Since the initial call, iShares MSCI Australia Index Fund (EWA) has gained around 6.5%, modestly outperforming the Global ACWI benchmark, and we are now changing our view to neutral for a number of reasons.  (You can find standardized performance for EWA here).
    First, Australia no longer looks particularly cheap compared to other developed markets. Second, inflation has accelerated over the past few months. In addition, the ongoing housing boom is leading to a pickup in mortgage delinquencies, which will negatively impact the banks. Finally, China’s effort to reign in its economy is leading to a dramatic slowdown in commodity imports, a negative for the Australian mining industry.
    Potential iShares solutions
    Overweight Healthcare
    IYH – iShares Dow Jones U.S. Healthcare Sector Index Fund (click here for fund details)
    IXJ – iShares S&P Global Healthcare Sector Index Fund (click here for fund details)
    AXHE – iShares MSCI ACWI ex US Health Care Sector (click here for fund details)
    In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Securities focusing on a single country, investments in smaller companies and narrowly focused investments may be subject to higher volatility.
    The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Dow Jones Trademark Holdings, LLC, MSCI Inc. or Standard & Poor’s. None of these companies make any representation regarding the advisability of investing in the Funds. Neither SEI, nor BlackRock Institutional Trust Company, N.A., nor any of their affiliates, are affiliated with the companies listed above.

    Carefully consider the iShares Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses, which may be obtained by calling 1-800-iShares (1-800-474-2737), or by clicking the Prospectuses link. Read the prospectus carefully before investing.
    Investing involves risk, including possible loss of principal.
    The iShares Funds (“Funds”) are distributed by SEI Investments Distribution Co. (“SEI”). BlackRock Fund Advisors (“BFA”) serves as the investment advisor to the Funds. The iShares Blog contributors are affiliated with BlackRock Fund Distribution Company (“BFDC”), which assists in the marketing of the Funds. BFA and BFDC are affiliates of BlackRock Institutional Trust Company, N.A. (“BlackRock”), none of which is affiliated with SEI.
    The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications or other transactions costs, which may significantly affect the economic consequences of a given strategy.
    The information provided is not intended to be tax advice. Investors should be urged to consult their tax professionals or financial advisors for more information regarding their specific tax situations.
    Neither BlackRock Institutional Trust Company, N.A., and its affiliates nor SEI and its affiliates provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor.
    This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.
    Stocks: AXHE, EWA, IYH, IXJ
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