2017 Outlook. Turning insight to action

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Byron Lambert
6 years ago
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1 2017 Outlook Turning insight to action

2 INSIGHT Regime change in progress... It s a statement that seems particularly resonant today as a new presidential administration looms and markets shake off a number of features of the post-crisis era. Economic growth, inflation and monetary policy are all in transition, and amid this change, strategies that worked in recent years may prove less effective. Here we provide insight and action items to prepare your portfolio for the three themes that we believe will define markets and shape the opportunity set for investors in 2017: Reflation is taking hold Multiple factors are conspiring to drive inflation rates up both domestically and abroad. The knock-on consequences of this shift already look significant. Yield curves globally are steepening to accommodate higher inflation expectations and the prospect of an accompanying uptick in growth, one potentially boosted by fiscal stimulus and higher wages in the United States. Low returns are likely to persist Though the global economy on the whole looks healthy, an aging population, weak productivity growth and excess savings are conspiring to keep a lid on growth potential. Amid high to ultra-high valuations across stocks and bonds, easy and outsized investment gains will remain tough to find. Dispersion is increasing The gap between winners and losers in the market is likely to widen from the depressed levels of recent years. Fiscal and regulatory changes will likely favor some strategies and sectors at the expense of others, suggesting that a more thoughtful approach to investing will prove imperative. For comprehensive market analysis and insight, see the BlackRock Investment Institute s Global Investment Outlook 2017.

3 ACTION ITEMS So What Do I Do With My Money? Prep your bond portfolio REFLATION Bond markets are in the midst of a profound shift as they recalibrate to accommodate higher inflation expectations and an improving economic outlook. One result: steepening yield curves present a risk for holders of long-dated bonds. In fact, many investors were recently reminded that their safest positions within their portfolios high-quality Treasuries and munis can suffer losses as bond prices fall amid rising rates. In this new market regime, we believe investors should adjust their stance in fixed income. Three actions may help ensure bond portfolios remain durable in the face of these market moves. Turn to TIPS Consider replacing nominal Treasuries with TIPS, which can help blunt the blow of higher inflation. Shorten duration Shift to shorter-maturity bonds that stand to better weather an uptick in interest rates. Get more flexible Favor fixed income strategies with the flexibility to capitalize on trends such as the yield curve shift. Inflation rates are on the rise Annual percent increase in price levels % % % 2016 Sources: Bureau of Labor Statistics, BlackRock. Inflation rates reflect full-year increase in the Consumer Price Index (CPI) from December to December. The 2016 inflation figure is based on the annualized increase in price levels from December 2015 through November 2016, excluding food and energy prices OUTLOOK

4 Rotate to emerging markets LOW RETURNS A low-return environment requires that investors expand their investment toolkit to enhance growth potential. This may mean lightening up on home-country bias. Select emerging markets (EMs) present opportunity given higher rates of growth than many developed markets (DMs) and more attractive stock valuations. Favorable earnings trends for EM companies and currently limited investor exposure increase our confidence. Reflationary dynamics may present a newfound tailwind for some EMs as well, potentially bolstering commodity prices and driving an uptick in global trade volumes. Maintaining exposure through the full market cycle, however, is critical to capturing the gains EM investing can offer. We favor approaches that aim to mute the swings in EM equities, either through a minimum-volatility strategy or pairing EM stocks with higher-quality EM bonds. Sizing up the opportunity in EMs Equity valuations, bond yields and GDP growth forecasts, EM vs. DM Equity valuations Bond yields GDP growth forecast 11.8x 15.9x 0.9 % 5.6 % 1.8 % 4.6% Emerging markets Developed markets Sources: BlackRock Investment Institute, IMF, MSCI, J.P. Morgan and Bloomberg, as of Dec. 8, Valuation figures represented by the MSCI EM and MSCI World indexes based on 12-month forward price/earnings ratio. Bond yields represented by the J.P. Morgan EMBI Global Diversified and Bloomberg Barclays Global G7 Treasury indexes. GDP growth forecasts are for For illustrative purposes only. It is not possible to invest directly in an index.

5 Look beyond the index DISPERSION At the broad index level, U.S. equity market volatility has remained seemingly muted. In reality, however, big swings have taken place below the surface saw a tremendous rotation in sector leadership among U.S. stocks. Once beaten-down financials now appear poised to benefit from rising interest rates and the prospect of looser regulation though short-term pullbacks could come after a recent run-up. Meanwhile, rising rates will pressure the low-volatility, high-dividend-paying shares that thrived in the first half of the year (e.g., utilities, telecoms and REITs). This generally increasing market dispersion argues for a more concentrated approach to equity investing either from a sector, style or market cap perspective. To sharpen your approach to investing in U.S. equities: Tilt toward value We see value stocks extending their strong performance in a broadly reflationary environment. Pursue dividend growth High-dividend stocks will likely struggle amid rising rates. However, quality companies consistently growing their dividends look wellpositioned; they have historically held up better when yields rise. Rotations in progress 2016 U.S. equity sector performance 25% 0-10 Real Estate Utilities Telecoms Consumer Staples Energy Consumer Industrials Info Tech Discretionary Financials First half Second half Sources: BlackRock Investment Institute, S&P, MSCI and Thomson Reuters, Dec. 8, Represents total returns for a range of S&P 500 indexes for the first half of 2016 and the second half to date. Past performance is no guarantee of future results. It is not possible to invest directly in an index. TURNING INSIGHT TO ACTION 5

6 Why BlackRock BlackRock helps people around the world, as well as the world s largest institutions and governments, pursue their investing goals. We offer: A comprehensive set of innovative solutions, including mutual funds, separately managed accounts, alternatives and ishares ETFs Global market and investment insights Sophisticated risk and portfolio analytics We work only for our clients, who have entrusted us with managing $5.1 trillion, earning BlackRock the distinction of being trusted to manage more money than any other investment firm in the world.* Want to know more? blackrock.com * AUM as of 9/30/16. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. If the index measuring inflation falls, the principal value of inflation-indexed bonds will go down and the interest payable will be reduced. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. Visit blackrock.com or contact your financial professional for a prospectus or summary prospectus, which includes investment objectives, risks, fees, charges, expenses and other information that you should read and consider carefully before investing. Investing involves risk, including possible loss of principal. Consult with your financial professional for additional information. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of Dec. 16, 2016, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy BlackRock, Inc. All Rights Reserved. BLACKROCK, ishares and SO WHAT DO I DO WITH MY MONEY? are registered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners. Prepared by BlackRock Investments, LLC, member FINRA. Not FDIC Insured May Lose Value No Bank Guarantee Lit. No. OUTLOOK-GUIDE A-USWA-1216 / USR-11139

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