Recent market volatility has shaken confidence. Heading into year end, we identify 5 themes for investors to consider.
The sharp sell-offs in the equity market seen in recent weeks are a reminder that markets share parallels with American football. Both reward measured ground games rather than betting on long bombs. Successful investing requires patience, discipline, and keeping the end goal in mind, despite the occasional setback. The iShares Investment Strategy team discusses five investing ideas to help move the ball closer to the goal line as discussed in the latest Investment Directions.
1. Downfield: Looking past political gridlock in the U.S.
Our base case still sees strong U.S. growth underpinning the global expansion and U.S. earnings continuing to impress. But like a quarterback looking for an open receiver, opportunities can be difficult to find. However, the U.S. midterm elections produced divided government and likely political gridlock with few long-term market implications for now. Historically, that has at times been a positive for markets. At the very least, the divided government means a number of sectors are in focus, including defense, healthcare, and infrastructure.
2. Japan: Stuck at the line of scrimmage
In Japan, a weaker yen, solid corporate fundamentals, bargain valuations, a stable political environment and central bank buying support an investment case for the country. Indeed, Japanese equities are outperforming the global developed ex-U.S. equities benchmark - and are less expensive. But like a talented team that can't quite win games, we see no catalyst for a rally and remain neutral.
3. Seek defense in emerging markets
Sometimes the best offense is a good defense, it turns out. Take emerging market (EM) assets, which have continued to struggle as decelerating global growth, along with greater macro uncertainty, has tightened financial conditions. We're constructive on EM equities, but this year is a sober reminder of the risks of EM investing. We remain positive toward EM as valuations have cheapened this year, positioning remains light, and earnings growth remains strong. Still, investors may want to consider a minimum volatility strategy, which historically has provided some buffer during sell-offs while at the same time capturing much of the upside.
4. Play-maker: Focus on the rise of rates
The backdrop for the current environment in many respects is the rise in interest rates. After trading sideways for most of the second quarter, Treasury yields rose steadily from the end of August through the beginning of October. This was largely due to increases in real rates, rather than inflation expectations. Clearly, the market is not yet worried about inflation. Nevertheless, we continue to favor TIPS over nominal Treasuries over the long term, as well as Treasury floating rate notes. With the market currently pricing in another rate hike in December and two more in 2019, expect the focus on TIPs to continue.
5. Playing the zone: Consider momentum and minimum volatility factor investing
From the perspective of factor investing, in the current environment, we favor momentum and minimum volatility, are neutral on value and quality, and underweight size. We like momentum because it historically has tended to perform best in expansions, but has also been resilient in economic slowdowns where stable growth maintains trends. As for minimum volatility, a slowing growing economy favors this more defensive factor. Valuations are reasonable, and its relative strength markedly improved in October amid an increasingly defensive tone in equity markets. We expect the focus on momentum stocks and min vol to continue in the weeks ahead.
Funds to consider
iShares U.S. Aerospace & Defense ETF (BATS:ITA)
iShares U.S. Healthcare ETF (NYSEARCA:IYH)
iShares U.S. Infrastructure ETF (BATS:IFRA)
iShares MSCI Japan ETF (NYSEARCA:EWJ)
iShares Currency Hedged MSCI Japan ETF (NYSEARCA:HEWJ)
iShares Edge MSCI Min Vol Emerging Markets ETF (BATS:EEMV)
iShares TIPS Bond ETF (NYSEARCA:TIP)
iShares Floating Rate Bond ETF (NYSEARCA:FLOT)
iShares Edge MSCI USA Quality Factor (BATS:QUAL)
iShares Edge MSCI Minimum Volatility USA ETF (BATS:USMV)
This post originally appeared on BlackRock Blog.