As markets climbed higher in recent weeks, investor sentiment seems to have turned from doubt to acceptance. Economic growth is above trend in most regions in the world, keeping us aloft, but we don't appear to be soaring too dangerously and in peril of overheating.
As BlackRock's recent Q4 Outlook discussed, this is still a good time to consider seeking out risk for the portfolio, but with many asset classes still pricey, where do we find opportunities? Call it the rethinking risk, rethinking returns conundrum.
But as the ETF Investment Strategy team notes in the recent Investment Directions commentary, we see four areas that offer interesting potential opportunities.
The value of value
Momentum stocks have shined this year. But we also favor the value factor, although some measure of caution has kept investors away from discounted segments of the market this year. However, flows into exchange traded products (ETPs) suggest sentiment could be shifting (source: BlackRock as of 10/31/17). We believe that value could benefit from a solid macro outlook, as well as improved sentiment.
Europe: Room to run
Despite recent headline noise around Spain, and stubbornly low inflation, we believe the rally in Europe, which has outperformed other developed markets this year, still has legs. We remain positive on European equities against a backdrop of sustained, above-trend economic expansion and a steady earnings outlook. ETP flows have been strong this year but still well short of 2016 outflows, suggesting the trade is not yet "crowded" (source: BlackRock as of 10/31/2017).
Emerging markets: Still in the early chapters
The strong outperformance of emerging market stocks in 2017 has investors wondering if the rally's days are numbered. We believe the strong performance can continue, as the underlying fundamentals of emerging markets are improving. Our favored markets include India, Indonesia, Brazil and Argentina.
Playing defense with bonds
We have moved to a neutral view on U.S. investment grade debt from overweight, but the demand for income still persists, as seen by the enormous flows into fixed income ETPs this year (see the chart below). Smart beta fixed income exposures that embed quality and value tilts relative to traditional market capitalization weighted index exposures are one potential solution.
A strong year: Top 5 bond ETF asset class 2017 flows
As always, geopolitical risks have the potential to disrupt the current environment. Long-term government bonds can be useful diversifiers against volatility and equity market selloffs sparked by the sort of geopolitical risks that Isabelle Mateos y Lago is watching.
Investors interested in the value factor may want to consider iShares Edge MSCI USA Value Factor ETF (BATS:VLUE). For Europe, you may want to consider iShares Core MSCI Europe ETF (NYSEARCA:IEUR). Emerging markets? Take a look at iShares Core MSCI Emerging Markets ETF (NYSEARCA:IEMG). Finally, investors who would like to access investment grade or high yield bonds through more defensive exposure may want to consider iShares Edge Investment Grade Enhanced Bond ETF (BATS:IGEB), or iShares Edge High Yield Defensive Bond ETF (BATS:HYDB).
This post originally appeared on the BlackRock Blog.