3 factors supporting emerging markets

Global stocks are testing the fall lows, the VIX is over 25 and oil continues to collapse–not the ideal environment for emerging market (EM) stocks. Yet, while EM equities have traded lower–along with every other risky asset–they are outperforming developed markets (see Chart 1).

EmergingFinal

In August, I suggested that EM stocks were beginning to look like that rarest of things in an aging bull market: a bargain. My timing, to be generous, was early. From the late July peak to the fall bottom emerging markets equities lost another 15%.

However, more recently EM stocks have been outperforming. Given the litany of concerns, from a trade war to tighter financial conditions, why are EMs outperforming and can it continue? Three factors to consider.

1. Still cheap, getting cheaper.

Emerging market stocks were inexpensive in July; they are cheaper today. Based on trailing earnings, the price-to-earnings (P/E) ratio has dropped from 13.1 to 12, the cheapest since late 2015. On a relative basis, the MSCI Emerging Market Index is still trading at a 30% discount to developed markets, close to the bottom of this cycle’s range.

2. A more range-bound dollar.

After rallying 10% from the February low to the August high, the rally has started to stall. While the Dollar Index (DXY) did make a nominal high in mid-November, more recently the index has been stuck around 96-97. This is important. In the post crisis-world a rising dollar has been associated with weaker EM returns. Since 2010, monthly changes in the dollar have explained roughly 30% of the variation in emerging market equity returns. A flat dollar removes a key headwind.

3. Slower growth and inflation suggest rates may be peaking.

During the spring and summer a stronger dollar coincided with rising interest rates. That has, at least temporarily, come to a halt. Investors are now more concerned about slower growth. This concern is beginning to show up in inflation expectations, which have recently fallen below 2%. Slower growth and decelerating inflation may allow for a quicker end to the Fed’s tightening cycle, another factor that would likely support EM assets.

Can EM rise?

Relative out-performance is one thing, but can EM assets actually start to rally? As others have commented, one way to frame 2018 is as a series of rolling bear markets. The trend was first evident in emerging markets, but quickly spread to commodities, European equities and most recently U.S. tech stocks.

In this light, EM’s biggest advantage may simply be the fact that it got the bear market out of the way early. With the asset class now trading at its lowest valuation since the 2015 bottom and some of the key headwinds abating, any shift in sentiment is likely to be accompanied by a big EM bounce. If or when that occurs, I see best opportunities in Asia.

Russ Koesterich, CFA, is Portfolio Manager for BlackRock’s Global Allocation team and is a regular contributor to The Blog.

Investing involves risks, including possible loss of principal.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of December 2018 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

©2018 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

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Source: https://www.blackrockblog.com/2018/12/18/factors-supporting-emerging-markets/

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Book recommendations for holiday reading

Need some book recommendations for your holiday gift list or to enjoy during a holiday season break? You’re in luck. My BlackRock Investment Institute colleagues and I recently discussed our top picks for holiday season reading as we head into the new year, compiling the titles into our annual December list of recommendations. Here are our picks.

Non-fiction picks

Crashed: How a Decade of Financial Crises Changed the World by Adam Tooze.

This 2018 book by economic historian Tooze, a Columbia University professor, is my top recommendation. It’s a heavily researched history of the 2018 Great Financial Crisis (GFC) and its aftermath up to early 2018. Tooze revisits, and frankly debunks in my view, a number of narratives about the crisis that have become conventional wisdom. He also raises many difficult questions, such as what could stem the wave of worldwide populism that the GFC helped release.

21 Lessons for the 21st Century by Yuval Noah Harari.

This 2018 book, a follow-up to Harai’s Sapiens and Homo Deus, is on my holiday reading list. Sapiens (on our 2018 summer reading list) focused on making sense of humans’ past, and Homo Deus (on our 2016 holiday reading list) focused on our future. Now, Harari examines the present in this book.

Asia’s Cauldron: The South China Sea and the End of a Stable Pacific by Robert D. Kaplan.

Jack Aldrich, a BlackRock Investment Institute business strategist, recommends this 2014 book to anyone seeking to learn more about Asia’s rich cultural and political histories, as well about where U.S. and Chinese interests come together (and diverge). Kaplan, a preeminent thinker on geopolitics and foreign affairs, offers insights on the strategic primacy of the South China Sea that Jack says are as relevant and insightful today as they were when the book was first published.

Doing Capitalism in the Innovation Economy: Reconfiguring the Three-Player Game between Markets, Speculators and the State 2nd Edition by William H. Janeway.

Axel Christensen, BlackRock’s Chief Investment Strategist for LatAm & Iberia, said this book is on his reading list. A Bloomberg podcast interview with author Janeway on “how the unicorn bubble will burst” brought this book–and the author’s interesting perspective as both an academic and a venture capitalist – to his attention.

The Fifth Risk by Michael Lewis.

Axel, a self-proclaimed big fan of Michael Lewis, also recommends this 2018 book on the risks lurking in today’s U.S. government infrastructure. Axel calls it “as close as you can get to a non-fiction horror story.”

The Sleepwalkers: How Europe Went to War in 1914 by Christopher Clark.

This 2013 book by historian Clark, another on my holiday list, is a slow read about how the world, well, sleepwalked into World War I. While not that recent, it has come back into the spotlight lately as people draw comparisons between the period before the First World War and the current unsettled state of the world.

The Undoing Project: A Friendship That Changed Our Minds by Michael Lewis.

This 2016 book is another pick from Axel. He describes it as “a great narrative” about the unlikely partnership of Israeli psychologists Daniel Kahneman and Amos Tversky that landed them a Nobel Prize in Economics and created the field of behavioral economics.

Fiction picks

Milkman: A Novel by Anna Burns.

This 2018 book, my fiction pick, won this year’s Man Booker prize. It’s a tale of life in Northern Ireland during the late 20th century Troubles that is grim, at times very funny, and often deeply engrossing despite what some reviewers may have written (and I’ve found it doubly engrossing in the audiobook version). It’s also a timely reminder about the dangers of not letting sleeping dogs (or, in this case, borders) lie.

All the Light We Cannot See by Anthony Doerr.

Lukas Daalder, the Chief Investment Strategist for the Netherlands within the BlackRock Investment Institute, recommends this 2014 Pulitzer-Prize winning book. He read the book after listening earlier this year to a podcast from Ritholtz.com that recommended the book, though the book has nothing to do with economics. Lukas’ reasons for recommending the book: it’s well-written, with a good build-up of tension and an unpredictable ending. I also recommend this book, which I absolutely loved.

Looking for more titles to consider?

Check out our August and June summer reading recommendations, as well as our holiday reading picks from last December and our previous reading lists from 2017, 2016 and 2015.

Isabelle Mateos y Lago is BlackRock’s Chief Multi-Asset Strategist. She is a regular contributor to The Blog.

Investing involves risks, including possible loss of principal.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of December 2018 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

©2018 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

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Source: https://www.blackrockblog.com/2018/12/18/book-recommendations-holiday-reading/

Three Reasons You’re Never Satisfied

Michael and Ben were talking about a new study they’d read at The Atlantic about how no one is happy with the amount of money they have, up and down the scale. The conclusion of the piece is that pretty much everyone says they’d be contented if they only had 2 to 3 times more wealth.
Now, of course, for people who don’t know where their next meal is coming from, this is a ludicrous proposition, but talk …
Source: https://thereformedbroker.com/2018/12/17/three-reasons-youre-never-satisfied/

3 lessons from 2018

Navigating markets in 2018 has been tough. Returns in many bond, equity and credit markets globally verge on finishing the year in negative territory. We find uncertainty around trade, together with higher interest rates, has been a major drag on stocks, offsetting solid earnings growth.

Here are lessons we draw from 2018

1. Geopolitics matter.

175766_BIICOTW_121718_v2_blog_social

We had warned markets were vulnerable to temporary draw-downs in 2018 if tough U.S. trade talk turned into actions. Yet the magnitude of the impact of geopolitics on markets has surprised us. This effect on stocks is reflected in the decline in valuations in the chart above. It corresponds with a rise in market attention to the risk of global trade tensions throughout 2018 and with market concern about geopolitical risk overall remaining at a historically elevated level. This is reflected in our BlackRock Geopolitical Risk Indicators. Geopolitical risks beyond the U.S.-China trade relationship have also played a role this year in European markets and in many emerging markets (EM), where the risks have been more local.

Adapting to rising rates and building portfolio resilience

We find trade frictions are more baked into asset prices than a year ago. Yet we expect the vagaries of U.S. trade policy changes to cast a shadow over markets. Another geopolitical risk causing us worry: the risk of fragmentation in Europe. Overall, we expect further market sensitivity to geopolitical risks in 2019 as global growth slows: We find the impact of geopolitical shocks on global markets tends to be more acute and long-lasting when the economy is weakening. See our BlackRock geopolitical risk dashboard.

2. Rising short-term yields have made cash a viable alternative to riskier assets for U.S.-dollar-funded investors and have exposed markets with weak fundamentals.

Two-year U.S. Treasury yields are now more than three times their average over the post-crisis period. Rising rates hit EM assets much harder than we expected this year and led to a wide dispersion in EM returns. We see many EM assets offering better compensation for risk as we head into 2019, with the Fed likely pausing its quarterly pace of hikes amid slowing growth and contained inflation. But EM countries with large external liabilities are vulnerable to any greater-than-expected Fed tightening.

icon-pointer.svg Read more market insights in our 2019 Global investment outlook and latest weekly commentary.

3. Build portfolio resilience.

Broad market draw-downs have become more frequent in 2018 as volatility has risen from the doldrums of 2017. Many market segments have fallen sharply, from financial stocks and crypto currencies to perceived safe-havens such as telecom stocks. We would be wary of assets seeing sharp price rises that are disconnected from fundamentals. We prefer a barbell approach: exposures to government debt as a portfolio buffer on one side and allocations to assets offering attractive risk/return prospects such as quality and EM stocks on the other. This includes steering away from assets with limited upside if things go right, but hefty downside if things go wrong. We see European equities and European sovereign bonds falling into this category.

Richard Turnill is BlackRock’s global chief investment strategist. He is a regular contributor to The Blog.

Investing involves risks, including possible loss of principal.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of December 2018 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

©2018 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

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Source: https://www.blackrockblog.com/2018/12/17/lessons-from-2018/

Did Dow Theory just trigger an important sell signal?

You know how skeptical I am of market maxims and rules of thumb and pattern recognition in general…
At best, these “signals” work sometimes and there are too many variables that are exogenous to the signal – so that a practitioner cannot know when it’s about to work and when it’s not. They can take a bow in hindsight on a signal foreseen but if things don’t play out, no one really…
Source: https://thereformedbroker.com/2018/12/16/did-dow-theory-just-trigger-an-important-sell-signal/

This Week on TRB

A week of light posting as I wrap up the year and prepare for my Christmas vacation…
This week Barry hosted the entire investment committee from all over the country for a full day of portfolio decision-making and discussion. Dan came up from Florida, Blair from New Orleans and Ben from Grand Rapids, MI.

Here’s Ben sitting with Michael to do their incredibly popular Animal Spirits podcast, which usually is re…
Source: https://thereformedbroker.com/2018/12/15/this-week-on-trb-273/

2018 Form 1040: Say hello to my little friend

The long-awaited 2018 Form 1040 has been finalized by the IRS. It comes very close to the promised “postcard” size, at 8½ x 5½, two-sided.

Here’s the front page:

2018 Form 1040 p1

 

And here’s the back page:

2018 Form 1040 p2

You can go to the IRS.gov website to see Form 1040 “live”.

Turns out that, apparently, all that was necessary to make the Form 1040 “easier” was to just create new schedules and move lots of pieces from the old Form 1040 to the new one.

Gone from Form 1040 are many components that we’ve grown to expect: IRA deduction, for one, was always on the front page of Form 1040, one of the traditional “above the line” deductions in calculating the Adjusted Gross Income.

The IRA deduction is still available, but you have to file a separate Schedule 1 (brand new for 2018) to take it and many other above the line deductions. I suppose now we’ll start referring to these deductions as Line 7 deductions – because that’s where they landed on the new form.

There are several of these new Schedules to get used to. As mentioned, Schedule 1 is where you’d include additions to or subtractions from your gross income to arrive at the adjusted gross income. Some examples of additions include: business income (from Schedule C), capital gains and losses (Schedule D), farm income (Schedule F), unemployment compensation, prize or award money, and gambling winnings. Subtraction examples include: student loan interest deduction, self-employment tax, educator expenses, and IRA contributions. Effectively all of Schedule 1 comes from the old Form 1040 front page. The figures from Schedule 1 are applied to Form 1040 in Line 6 (additions) and Line 7 (subtractions).

Schedule 2 encompasses Alternative Minimum Tax (AMT) and excess advance premium credit repayments. The total of these amounts flows to Line 11b on the new Form 1040. This Schedule replaces the old Lines 45 & 46.

Schedule 3 is for non-refundable credits (other than the child tax credit and the credit for other dependents). Located here are the foreign tax credit, child and dependent care credit, education credit, Saver’s credit, and others. The Schedule 3 total flows to Line 12 on Form 1040, and is added to the child tax credit and credit for other dependents (Line 12a). Schedule 3 has replaced Lines 50-54, and new Line 12a replaces old Line 49.

Schedule 4 is for additional taxes, such as self-employment tax, extra tax on retirement plans (Form 5329 tax), and other additions to tax. The result from Schedule 4 flows to Line 14 on Form 1040. This Schedule has replaced Lines 57-62.

Schedule 5 is where the refundable credits come in. These were previously located on lines 66-73. Earned Income Credit has its own place on Form 1040, on Line 17a, as do the additional child tax credit (Line 17b) and the American Opportunity credit (Line 17c). The rest of the refundable credits are found on Schedule 5: estimated tax payments, net premium tax credit, and the like. These amounts from Schedule 5 are included with the above three items produce a sum on Line 17 of Form 1040.

Schedule 6 has limited applicability – it is for taxpayers with a foreign address or who wish to designate a third party to discuss their tax return.

All in all, I’d say we didn’t improve much with this change. The instructions are actually a bit longer than before, at 117 pages (versus 107 for 2017 Form 1040). But that’s likely due to the introduction of the new schedules and the like.

The post 2018 Form 1040: Say hello to my little friend appeared first on Getting Your Financial Ducks In A Row.


Source: https://financialducksinarow.com/12942/2018-form-1040-say-hello-to-my-little-friend/

Can You Beat the Market?

In investing and finance, the words “beat the market” appear from time to time either as part of an investment strategy, conversation, or a combination of both. Investors can often be lured by the phrase in the hopes of achieving returns superior than the market or “above average”.

When we refer to the market, we’re generally referring to a benchmark such as the Dow Jones Industrial Average (The Dow) or the S&P 500.

First off, I’d like to offer a bit of clarity before attempting to answer the titular question. If fact, I’d like to ask two questions and answer both – because they will have different answers, even though they look similar.

First, I think it’s appropriate to ask this question:

Can the market be beaten?

To which I answer, yes. The market can be beat, and there are times where certain investments have done better than the market.

The second question I’d like to ask is found in the title:

Can you beat the market?

To which I answer, likely no, and good luck if you try.

Do you see the similarities in the questions? Both have inferences of outperforming the market, but the second question asks the reader specifically. In other words, the market can be beat, and gets beaten every year. The odds are, you won’t do it.

The reason it’s hard to beat the market is information, or lack of it. Do you have access to the information that billion-dollar firms have access to – and the speed in which they can access it?

Do you have the money and time to invest in company analysis, research, and due diligence?

Finally (and maybe most important), do you have the temperament to try to beat the market? By temperament I mean the patience, tolerance, grit,and self-control. These are needed to stay in an investment when it’s getting beat up as well as the wisdom to sell or buy when necessary.

And then there are the costs of trying to beat the market – fees, commissions, etc., all eat into returns. The market doesn’t have to contend with them.

While not impossible, beating the market is a gargantuan battle. And to do so consistently is extremely difficult. Let me also leave you with some proof. Every year S&P releases information on how US equity funds did relative to their benchmark (the market). You can find the report by clicking here.

The post Can You Beat the Market? appeared first on Getting Your Financial Ducks In A Row.


Source: https://financialducksinarow.com/12873/can-you-beat-the-market/

Portfolio Reflections and Resolutions

As the New Year approaches, it’s a healthy exercise to evaluate the year that’s ending and look ahead to the next one. Here we offer a collection of insights our BlackRock Portfolio Solutions team has gathered from working with thousands of advisors on close to ten thousand investment models in the past twelve months.  We hope you find the look back and the look ahead helpful.

2 things we learned in 2018

1. Corrections still happen

Entering 2018, it was easy to forget that markets actually can and do go down. The S&P 500 had held below its long-term average volatility for the previous six years, and hadn’t dealt investors a 10% decline in almost two years. In 2018, we saw two such corrections – the first beginning in late January and the second in early October. The first was hard to react to. It lasted only nine days, and quickly reversed as the market reached new highs in the subsequent months. Advisor models weren’t defensively postured entering the year, and it turns out they didn’t need to be for that first correction.

The second correction was more significant–not in magnitude but in the way it eroded confidence. As the year ends, we notice that, compared to earlier in the year, advisors are more concerned about global trade issues and less certain about where we are in the market cycle.

In the past, our stress test analysis of all ten thousand models suggested advisors had client portfolios well-positioned for further economic growth (the right call), but not well-positioned for a recession. If the collective views of the advisors we work with are shifting, we should expect advisor models to demonstrate that change.  While we’ve learned that corrections do still happen, we haven’t seen much evidence that advisors are doing much about them….yet.

2. Cash can actually produce yield

A key story line this year has been the rise in yields of short maturity bonds and cash-like instruments. However, although the inflation-adjusted yields on short maturity bonds are positive for the first time in years, they are still not likely enough to sustain most investors in the long run.

Considering bond portfolios in isolation, advisors are right to shift into shorter maturity bonds, which now yield almost as much as longer maturities do. We do find short-term bonds attractive today, and the increased yields now available offer a buffer in case rates continue to rise. However, almost every model in our data contains stocks, and the decisions you make in managing bonds in isolation are different than those you make while also managing equities. As we approach the ninth rate hike into a Fed tightening cycle, we believe investors can be a bit less concerned about losing money in bonds, and a bit more comfortable adopting a conventional view that bonds can diversify the risk of your stocks falling.

2 things we’d do in 2019–A potentially more difficult year

1. Get properly diversified

If the corrections of 2018 remind us of anything, it’s that we cannot ignore the importance of diversification in building resilient portfolios. We likely need to own some (not necessarily a lot) of what makes us uncomfortable; this is where real diversification comes from. Ask yourself, “If the markets moved in the opposite direction from the way I think, will any of my investments do well?  If you feel good about everything in your portfolio simultaneously, then you aren’t likely well-diversified.

At a minimum, re-balancing your portfolio should help. However, considering that the market environment may be shifting, re-allocating your portfolio may be what’s needed. This is not to suggest shifting assets from stocks to bonds, nor going to cash – your long term asset allocation is critical to reaching your investment goals. Rather, it may be time to consider owning different things within the stock and bond sleeves, particularly things that improve the diversification of each sleeve or the portfolio as a whole.

2. Manage investing emotions

The more volatile the market events, the more emotive the human response. Successful investing avoids emotional overreactions to any one bad day, bad monthly statement, or a poor result from a bad stock pick. Turning off the television can help.

Try to envision a larger picture. There have always been volatility spikes in markets, and there likely always will be. Successful investors understand how to navigate the emotions that come with them.

Preparation is important. If you suspect the market environment may be shifting in the coming year, simulate that now, and decide what things you plan to add to the portfolio (along with the things you plan to remove). If you can, stress test both portfolios to ensure your changes will give you the shift in outcomes you seek.

If market volatility starts to make you nervous, ask yourself an important question; “Am I bearish or am I uncertain?” Don’t confuse the two. If you are bearish, then make the portfolio more conservative. But if you are uncertain, then don’t make big bets in either a bullish or bearish direction. Importantly, uncertainty should lead your portfolio weights back to your strategic asset allocation–not to cash.

Being under-risked can be as problematic as being over-risked. There’s no reason to be either while you are under-confident.

Bottom Line

As we prepare for the ball to drop in Times Square, it’s a great time to take stock of your portfolio. At moments of uncertainty, it’s important to simplify your process, reduce the size of your bets, and don’t get hung up on the last 10 years as if it’s the only type of market that can exist.

Shifting your focus to regimes–not weeks or months–can allow you to stay nimble, play defense if needed, and capitalize on the next market environment as it begins to develop.

Patrick Nolan is the Portfolio Strategist within BlackRock’s Portfolio Solutions group. He is a regular contributor to The Blog.

Investing involves risks, including possible loss of principal.

There can be no assurance that performance will be enhanced or risk will be reduced for investments that seek to provide exposure to certain quantitative investment characteristics (“factors”).  Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods. In such circumstances, an investment may seek to maintain exposure to the targeted investment factors and not adjust to target different factors, which could result in losses.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of December 2018 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

©2018 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

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Source: https://www.blackrockblog.com/2018/12/14/portfolio-reflections-resolutions/

3 market themes likely to shape 2019

It has been a tough year to navigate financial markets. We have seen more than $6.9 trillion shaved off global market cap since the equity market’s peak in January, and many equities have sold off despite strong earnings reports. We may end 2018 with a rare event: negative annual returns for both stocks and bonds. The culprits: uncertainty over trade disputes, late-cycle concerns and tighter financial conditions.

Where to next? Roughly 100 BlackRock investment professionals recently gathered for two days to talk markets and the outlook for 2019. A major takeaway from our discussions: Three themes are likely to shape markets in 2019, as we write in our 2019 Global investment outlook.

Theme 1: Growth slowdown

We see a slowdown in global growth and corporate earnings in 2019, with the U.S. economy entering a late-cycle phase. Our BlackRock Growth GPS has been trending lower across the U.S. and euro-zone, pointing to a slower pace of growth in the 12 months ahead. We see U.S. growth stabilizing at a much higher level than other regions, even as the fading effects of domestic fiscal stimulus weigh on year-on-year growth comparisons. This underscores our preference for U.S. assets within the developed world. We expect the Chinese growth slowdown to be mild, as the country appears keenly focused on supporting its economy via fiscal and monetary stimulus.

Slowing growth and the impact of tariffs make for a more cautious corporate outlook, with global earnings growth likely to moderate. In the U.S., the expected slowdown partly reflects a higher hurdle versus 2018 when corporate tax cuts provided a big boost to company earnings. U.S. earnings growth estimates look set to normalize from a heady 24% in 2018 to 9% in 2019, consensus estimates from Thomson Reuters data show. This is still above the global average. Emerging markets (EM) are set to maintain double-digit earnings growth, led by China as its tech sector recovers and a pivot toward economic stimulus supports its economy. The U.S. and EMs remain our favored regions, as we see U.S. and EM companies best positioned to deliver on expectations. Yet we expect muted returns for both stocks and bonds in 2019 against a backdrop of slowing growth.

icon-pointer.svg Read more market insights in our latest Global investment outlook.

Theme 2: Nearing neutral

We see the process of tightening financial conditions pushing yields up (and valuations down) set to ease in 2019. Why? U.S. rates are en route to neutral—the level at which monetary policy neither stimulates nor restricts growth ­—and the Federal Reserve looks likely to pause its tightening process. Our analysis pegs the current U.S. neutral rate at around 3.5%, a little above its long-term trend. While uncertainty abounds over where neutral lies in the long run, our estimate sits in the middle of the 2.5% to 3.5% range identified by the Fed. We currently see a rate near the top of this range needed to stabilize the U.S. economy and debt levels. Yet we expect the Fed to become more cautious as it nears neutral. As a result, we expect the FOMC to pause its quarterly pace of hikes amid slowing growth and inflation in 2019. We see the pressure on asset valuations easing as a result. Europe and Japan will likely take only timid steps toward normalization. We don’t expect the European Central Bank to raise rates before President Mario Draghi’s term ends in late 2019.

Theme 3: balancing risk and reward

Recession fears are joining trade as a key market worry in 2019. Markets are vulnerable to fears that a downturn is near, even as we see the actual risk of a U.S. recession as low in 2019. Still-easy monetary policy, few signs of economic overheating and a lack of elevated financial vulnerabilities point to ongoing economic expansion in 2019. Yet the odds are set to rise steadily thereafter by our analysis, with a cumulative probability of more than 50% that recession strikes by end-2021. See the chart below.

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Trade frictions and a U.S.-China battle for supremacy in the tech sector also loom over markets. We see trade risks more fully reflected in asset prices than a year ago, but expect twists and turns in trade negotiations to cause bouts of anxiety. Increasing uncertainty points to the need for quality assets in portfolios—but also potential for upside should market fears about trade ebb in 2019.

We advocate a barbelled approach for carefully balancing risk and reward: exposures to government debt as a portfolio buffer, twinned with high-conviction allocations to assets that offer attractive risk/return prospects. Quality has historically outperformed other equity style factors in economic slowdowns, our analysis shows. We see EM equities as good candidates for the other end of the barbell. What to avoid? Assets with limited upside if things go right, but hefty downside if things go wrong. We see many credit and European assets falling into this category.

Richard Turnill is BlackRock’s global chief investment strategist. He is a regular contributor to The Blog.

Investing involves risks, including possible loss of principal.

Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments. Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.

International investing involves special risks including, but not limited to currency fluctuations, illiquidity and volatility. These risks may be heightened for investments in emerging markets.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of December 2018 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

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Source: https://www.blackrockblog.com/2018/12/13/market-themes-2019/