BlackRock Chief Investment Strategist Russ Koesterich is encouraging U.S. investors to drop their home bias and consider emerging market ETFs that offer better economic growth rates and more attractive valuations.
“Our 2013 recommendation is to raise allocations to emerging market countries,” Koesterich said at the recent 2013 ETF Virtual Summit.
Overall, he said U.S. stocks are trading at a 40% premium to the rest of the world on a price-to-book ratio. Also, gridlock and Washington combined with higher taxes and lower government spending make the U.S. the “biggest risk” to the global economy in early 2013.
Aside from cheaper valuations and faster growth relative to developed markets, the BlackRock strategist said inflation is less of a problem than in recent years. [Two Reasons to Stick With Emerging Market ETFs]
Also, emerging markets are more volatile than developed economies but the gap is narrowing. In other words, emerging markets are getting less volatile compared to developed, so they’re not as risky as they have been in the past, he said.
Meanwhile, the U.S. has sidestepped the fiscal cliff for now but there are some key events on the calendar the next two months that are potential “tripwires,” Koesterich noted. These include deadlines on the debt ceiling and the so-called sequester.
“There are a lot more opportunities for Washington to give investors angst,” he said.
Although Koesterich said investors should bring down their allocation to U.S. stocks, the strategist prefers sectors such as energy and technology that are leveraged to international growth, and large companies with a lot of sales overseas. [iShares: Is the US Consumer Back?]
Conversely, he advised avoiding expensive parts of the U.S. market investors are gravitating to for perceived safety, such as utilities and consumer staples.
“They’re expensive because people want to avoid volatility by bidding up companies less sensitive to the economy,” the BlackRock executive said. [Consumer Staples ETFs: Don’t Overpay for Safety]
BlackRock manages the iShares lineup of ETFs.
iShares MSCI Emerging Markets (NYSEArca: EEM)
Full disclosure: Tom Lydon’s clients own EEM.