Ways To Play Potential Market Opportunities In Q2

by: Heidi Richardson

As my colleague Russ Koesterich pointed out earlier this week, the start of a new quarter is always a good time to take a step back and give your investment portfolio another look.

Looking at the first quarter in the rear-view mirror, it largely played out as we expected, but there were a few surprises, including how much the dollar has strengthened and how far interest rates have fallen. Given this, while we at BlackRock currently still prefer stocks over bonds, it may be more important than ever to be choosy within your equity portfolio.

So, where do we see potential opportunity?

The 2015 Spring Update to BlackRock's annual outlook highlights a few key areas, but you may still be looking for more details about the specific markets and sectors. Here are four equity segments to consider now, including options for accessing these exposures with iShares exchange traded funds (ETFs).

  1. Europe/Germany

    There are several reasons to consider the eurozone, and Germany in particular. First, the European Central Bank's (ECB) $1.1 trillion bond buying program is beginning to serve as a catalyst for economic growth in Germany and the broader region. It also has pushed yields to negative territory in some cases, driving income-seeking investors toward European stocks, according to first-quarter flow data. In addition, the stronger U.S. dollar could potentially boost the revenues of the region's export-oriented economies, notably Germany. Finally, European stocks still trade at a significant discount to their U.S. counterparts and their long-term average.

    However, while the European market may benefit from these tailwinds, it's important to consider the possible impact that a further potential weakening of the euro could have on U.S. dollar-based investments in the region.

    Two options to consider when accessing this potential opportunity are the iShares Currency Hedged MSCI Germany ETF (NYSEARCA:HEWG) and the iShares Currency Hedged MSCI EMU ETF (NYSEARCA:HEZU). These iShares ETFs invest in German and eurozone securities, respectively, and seek to mitigate exposure to fluctuations between the value of the euro and the U.S. dollar.
  2. Japan

    Another developed market worth considering is Japan. In addition to a market-friendly central bank, there are other reasons to like stocks in the Land of the Rising Sun. Japanese equities remain inexpensive even after outpacing the U.S. market year-to-date, as strong earnings momentum has kept valuations in line. Abenomics reforms are encouraging shareholder-friendly activity, and wage increases could be a boon to consumer spending. Additionally, exports and tourism are hitting record numbers, and the market continues to benefit from increased equity buying by pension funds. On the heels of plans by the Government Pension Investment Fund (GPIF) to double its investment into Japanese equities, other institutional investors have committed approximately $250 billion.

    Investors can consider accessing this developed market potential opportunity with ETFs such as the iShares MSCI Japan ETF (NYSEARCA:EWJ) and the iShares MSCI Currency Hedged MSCI Japan ETF (NYSEARCA:HEWJ).
  3. Emerging Markets

    Though risks and performance vary by country, we see potential among the broader group of emerging markets, and in particular, emerging Asia. As an oil-importing region, Asia may benefit from lower oil prices, and the rally in China's Shanghai-listed A Shares (difficult for non-Chinese investors to access) is extending to other markets in the region. Finally, reforms in countries such as China and India could potentially open up their economies and continue their growth.

    ETFs such as the iShares Core MSCI Emerging Markets ETF (NYSEARCA:IEMG), which uses the MSCI Emerging Markets Investable Market Index as its benchmark index, offer diversified exposure to Asia and other emerging markets.
  4. U.S. Technology

    Finding value in the U.S. has become more difficult, but the U.S. technology sector has potential for continued growth. Mature, established tech companies are demonstrating that "cash is king," by putting their large cash accounts to work for shareholders through buybacks and dividends. For example, several prominent technology companies have already raised dividends. In addition, tech firms' strong balance sheets may help insulate these companies as interest rates rise over the longer term.

    One option to consider for access to the U.S. technology sector is the iShares U.S. Technology ETF (NYSEARCA:IYW), which is a pure technology play, as it's presently the only technology ETF that doesn't also include telecom companies.

Source: BlackRock

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