What does this all mean to your investments? Monetary conditions and less stretched valuations are acting as tailwinds for international stock markets, even after accounting for European politics. This improvement in the relative performance of international stocks is evident and starting to impact investor behavior in the U.S., driving fund flow to non-U.S. markets.
While stocks are no longer cheap, they are a veritable bargain compared to bonds. With more of the world’s bonds being purchased by the ECB and other central banks, yields remain well below historical levels and negative interest rates are becoming increasingly common. Against this backdrop, we are moving from an overweight to a neutral posture in residential mortgage-backed securities (MBS). MBS had a nice run in 2014, but interest rate volatility has increased markedly since year-end, making it a tough environment for the sector. Instead, we would continue to emphasize U.S. high yield bonds and longer-dated municipals, as we believe both still offer some relative value within fixed income.
Source: Bloomberg.
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The Blog and you can find more of his posts here.