There are times in the business cycle when “buying the market” may be the smartest approach to building a portfolio. Choose the right balance—stocks and bonds, international and domestic, traditional and alternative—and an investor can feel reasonably confident that they will do well for clients.
This is not that time, in our view. We’re currently in a market environment which is bearing the consequences of years of extreme monetary policy, effectively borrowing returns for the future. As such, we see returns suffering broadly, with a low-return world—suppressing yields and the potential for price appreciation—the ongoing expectation.
Meanwhile as monetary policy reaches its limits and as valuations for many assets have gotten expensive, it’s clear to see that sharp spikes in volatility are lurking out there.
What it means for advisors and clients is that until the cycle takes its next turn, selectivity will be key to generating incremental return. Rather than simply buying the market, investors will need look more deeply into what’s ultimately driving that market.
Painting with a narrower brush
So how can you fine-tune your allocation strategy to capture potential drivers of growth without carrying the excess baggage of unwanted exposures?
Single-country exchanged traded funds (ETFs) offer a low-cost way to implement a more selective investment view. Much as you might add a sector position on information technology or banks, for example, these “precision instruments” allow investors to express a conviction on an individual country, using finer strokes than the broad brush of an MSCI EAFE or Emerging Market (EM) index.
In the second half of the year, we’ve been warming up to emerging markets, particularly on the bond side. But we believe this single-country approach can be especially useful for considering emerging market stocks. The asset class tends to be viewed monolithically, yet the underlying economies are widely different—encompassing both the world’s second-largest economy in China, and tiny Peru, with a GDP half the size of Beijing’s. The performance of a broad benchmark like the MSCI EM reflects these disparities. (Keep in mind that investing in emerging markets, whether broadly or in single countries, can carry unique heightened political, economic, liquidity and volatility risks.)
Over the longer term, two countries where we see attractive risks developing are India and Mexico. In India, the slow grind of enacting reforms continues, and are broadly pro-business in their slant, aiming to liberalize and attract foreign investors and corporations.
In Mexico, stabilizations in the oil price, the currency and the domestic and U.S. economy—combined with their competitive labor force and minimal direct export exposure to the UK and Europe—should all remain supportive to investors.
This is not a case against holding a broad EM index investment, of course; the asset class has played an important strategic role as a portfolio diversifier. Alongside this core exposure, however, single-country ETFs can provide opportunities for investors to potentially enhance returns by isolating and accessing the world’s most attractive opportunities.
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Tushar Yadava is an Investment Strategist in the iShares U.S. Investment Strategy team, part of the Global Investment Strategies & Insight (ISI) Group. Global ISI delivers macro and market insight, leveraging BlackRock's thought leadership platforms to provide iShares clients with executable investment ideas using iShares ETFs.
Buying and selling shares of ETFs will result in brokerage commissions. The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).
This material represents an assessment of the market environment as of the date indicated; is subject to change; 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 issuer or security in particular. iS-18756