Blackrock has a favourable view on equities, relative to bonds, but within fixed income it advocates an unconstrained approach. Amanda White spoke to chief investment strategist, Russ Koesterich.
Equities look cheap relative to bonds or cash, says chief investment strategist for Blackrock and iShares chief global investment strategist, Russ Koesterich, with the manager recommending an overweight position in equities.
While equities are stressed they are cheaper than bonds or cash on a relative basis.
“At the highest level we would be overweight equities,” he says.
Within equities the manager is overweight Europe, cutting back on its US exposure.
“Europe is politically more stable and the risks are reflected in the price, which is a good deal cheaper than US.”
Koesterich, who is a founding member of the Blackrock Investment Institute which delivers Blackrock’s insights on global investment issues, says the discount in European equities relative to the US is sufficiently cheap, and when combined with the catalysts for growth in Europe, it look attractive.
He cites the possibility of an additional stimulus by the European Central Bank at the end of the year, and a more favourable monetary environment.
“The US market is fully valued. I don’t see it as particularly expensive but it’s not a bargain. Most of the gains in the US have been through multiple expansion, through stock market expansion, and it’s become expensive.”
Quantitative easing has supported this and also impacted the long-end of the treasury curve.
The impact of this is that investors are looking to source yield in alternative places.
Within fixed income, Koesterich says it is still hard to find any bargains, although there are pockets of opportunities including the US municipal market and hard currency and emerging market debt.
Blackrock is an advocate of unconstrained fixed income, which gives the manager greater flexibility to make larger latitudinal shifts in duration.
“Adjusting against duration is an advantage of a non-benchmark portfolio,” he says.
Given the continued volatility in fixed income Blackrock argues for an unconstrained fixed income portfolio, particularly given traditional benchmarks are typically concentrated in government-related debt.
And while the future is difficult to predict, the manager says there are three factors that will shape the direction of the bond market: interest rates should move higher over the year; rates at the “belly” of the yield curve will rise more dramatically than long-term rates; and volatility among and within fixed income sectors should be high.
As chief investment strategies of the world’s largest manager, Keosterich has a big job, which is made easier by the fact the firm has a lot of scope, and he can draw on experts from every asset class.
There are often cases when Blackrock’s views are the same as other managers, but the purpose is not to be different.
“We don’t set out to have a different view but to do what is best for clients,” he says.
In terms of portfolio construction, he advises investors should always keep in mind what “they are afraid of”.
“Putting portfolios together should be driven by the idiosyncrasies of what an investor is trying to achieve,” he says.
He believes there is often too much focus on returns with risk often omitted.
“Risk is important to think about, and if investors are basing risk on the past 18 months they may be underestimating risk.”
Investors must first decide what risk they are hedging or defending against – whether it be equity market slowdowns or interest rates – and change their investments accordingly.
