Spring forward: Five themes for the coming months

Feb 26th, 2019 | By | Category: ETF and Index News

By Chris Dhanraj, Head of the iShares Investment Strategy team, BlackRock.

Chris Dhanraj, Head of the iShares Investment Strategy team, BlackRock

Chris Dhanraj, Head of the iShares Investment Strategy team, BlackRock.

Tired of winter? Never fear: Once again, spring is near. For all of us, it is a time of growth, renewal, and restoration. For investors, it is also time to take stock of whether they are on course, or to identify potential storms that may lie ahead.

Although markets in 2019 have enjoyed a healthy start to the year, concerns over slowing growth, economic and earnings outlooks, and US-China and European political risks are ever-present. Investors should begin to consider defensive exposures.

Our take on the five major themes for this quarter:

  1. In US equities consider the healthy healthcare sector.

In an environment of slowing growth and less certain earnings outlooks, the resilient earnings growth of healthcare stocks is appealing. Plus, valuations broadly look reasonable compared to historical levels. Tactical investors may consider getting more granular by focusing on exposure to the medical devices industry.

Source: BlackRock.

Source: BlackRock.

  1. As leaders decide what’s next for Brexit, stay underweight UK and European stocks.

With Theresa May’s Brexit plan resoundingly defeated, she must now renegotiate a deal. We believe the United Kingdom is likely to avoid a hard exit with an extension of the March 29 deadline to exit and gain time to draft a passable proposal. But lingering uncertainty is likely to keep UK assets under pressure while a deeper slowdown in European and global growth only accentuates the challenges. We remain underweight UK and European equities.

  1. Despite a bad 2018, China is looking ahead.

Although Chinese equities tumbled in 2018, we continue to favor China as well as emerging markets overall. Although trade tensions are likely to persist, we believe frictions will subside in the short run. And we find trade tensions are reasonably priced into Chinese equities. Meanwhile, accommodative policy measures and sustained earnings growth in China could lift investor sentiment.

Funds to consider

iShares US Healthcare ETF (IYH US)
iShares US Medical Devices ETF (IHI US)
iShares MSCI United Kingdom ETF (EWU US)
iShares China Large-Cap ETF (FXI US)
iShares MSCI China ETF (MCHI US)
iShares 20+ Year Treasury Bond ETF (TLT US)
iShares Long-term Corporate Bond (IGLB US)
iShares Edge MSCI USA Momentum Factor ETF (MTUM US)
iShares Edge MSCI USA Quality Factor (QUAL US)

  1. Remember: Ballast matters with bonds.

In 2018, investors were rightly concerned about duration risk as interest rates rose due to Fed tightening, inflation fears, and rising deficits. But during December’s equity sell-off, yields fell – long-duration US Treasuries (as measured by the ICE US Treasury 20+ Year Index) returned +5.6% – a stark reminder of the key role bonds can play as a diversifier in a portfolio. We favor holding long duration Treasuries and highly rated investment grade bonds for this purpose.

  1. Factors: Momentum on defense, quality is diverging.

Our outlook for momentum has declined to a moderate overweight; it remains attractive, but its relative strength has markedly weakened from the strong levels seen since Q4 2016. Our outlook for minimum volatility has improved from moderately underweight to moderately overweight this quarter and we have downgraded quality from moderately overweight back to neutral. We remain neutral on value, and underweight size.

(The views expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)

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