BlackRock’s investment outlook for 2016
BlackRock: US stocks appear fully valued
“Many U.S. stocks appear fully valued,” said the BlackRock (BLK) report. We at Market Realist had analyzed relative value across the developed markets in our series US Equity Is Expensive: Japan and Europe Offer Relative Value. In this series we shed light on the following:
- Equity has been soaring in the US while profitability lags behind.
- On the price front, US equity is expensive compared to European and Japanese equity.
- Japanese and European equity indices have delivered higher returns on equity (or ROEs).
- More QE and the cheaper euro will benefit investors in European equity.
- Abe’s “third arrow” and focus on corporate profitability will benefit investors in Japanese equity.
- ETFs such as the WisdomTree Europe Hedged Equity ETF (HEDJ) and the Deutsche X-trackers MSCI Europe Hedged Equity ETF (DBEU) provide exposure to European equity while hedging against adverse currency movements.
- ETFs such as the WisdomTree Japan Hedged Equity ETF (DXJ) and the Deutsche X-trackers MSCI Japan Hedged Equity ETF (DBJP) provide exposure to Japanese equity while hedging against adverse currency movements.
Stocks over bonds
On the asset allocation front, BlackRock prefers “stocks over bonds” as it sees little or no price appreciation in fixed income. Moreover, with the Fed tightening, yields are due to rise further and send bond prices down.
On the strategy front, BlackRock (BLK) prefers market-neutral strategies like:
- Long/short equity strategy: taking long positions in stocks that are expected to appreciate and short positions in stocks that are expected to decline
- Credit: looking for relative value between senior and junior securities of the same corporate issuer. Investors in this strategy tend to prosper when credit spreads are narrow during robust economic growth periods.
What investors may nibble at
BlackRock also seemed to have a favorable view for some of the following:
- hard currency emerging market debt (EMB) that looks attractive relative to government bonds
- global oil majors and low cost US shale explorers
- beaten-down emerging market stocks (EEM)
Credit Suisse and Barclays also seem bullish on European equity for 2016.