Investment Calls
• First Half: My broad allocation call – equities over bonds – was successful, with equities trouncing bonds year to date. But overall, my fixed income calls were generally more successful than my equity ones.
On the fixed income side, I advocated generally overweighting credit over duration. This practically translated into a preference for municipals, bank loans and floating rate notes (as well as high yield for more aggressive investors) over Treasury bonds and TIPS. So far this year, high yield, floating rate notes and municipals have all outperformed Treasuries and TIPs.
On the equity side, my calls were more mixed. I advocated a bias toward large and mega-cap stocks; a focus on a yen-hedged position in Japan; and an overweight to emerging markets. While Japan has performed well year to date, emerging markets have been a disaster and my style bet has been a bit of a wash.
• Second Half: I’m generally sticking with my calls. But while I still like emerging market stocks over the long term, I’m now advocating selectively trimming some exposure, particularly to Russia and South Africa.
As I write in a new midyear outlook paper from the BlackRock Investment Institute, differences between emerging markets are growing and investors must be discerning. Russia, for instance, is likely to be hurt by less liquidity and a stronger dollar. Meanwhile, South Africa looks expensive given the country’s prospects for weak growth and ongoing political uncertainty.
Finally, with real rates rising, I now advocate lowering exposure to gold. Stay tuned for more on my outlook for the second half.
Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist.