Investment Directions Q2 2012


Published on

For the 2nd quarter, Bob Doll, Chief Equity Strategist and Jeff Rosenberg, Chief Investment Strategist for Fixed Income, with BlackRock, believe the backdrop for equities remains supportive, fixed income credit offers more value, and municipal bonds continue to remain attractive relative to taxable fixed income.

  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Investment Directions Q2 2012

  1. 1. 2 0 12BlackRock Investment DirectionsAsset Allocation OverviewAs US economic data continues to improve and concerns about the European sovereigndebt crisis recede, investors’ appetite for risk appears to be increasing. Althoughdownside risk remains and risk assets have already experienced a considerable rally,we see opportunities still in equities and credit-related fixed income, while government-backed debt is likely to lag amid the more optimistic outlook.So What Do I Do With My Money? Bob Doll Chief Equity Strategist} verweight Equities: The macro backdrop is supportive, and as long as O for Fundamental Equities fundamentals remain sound, we believe equity valuations can continue to expand.} educe Interest Rate Risk: With government bond yields on the rise, credit R Jeffrey Rosenberg sectors offer more value, though we believe rates will be capped by longer-term Chief Investment Strategist demand for limited fixed income supply. for Fixed Income} tick with Munis: While yields have the potential to follow Treasury rates higher S and some headline risk lurks in the near-term, tax-exempt munis continue to be attractive relative to taxable fixed income.Asset Allocation Views Key = previous quarter = current quarter Strength of Preference Current Outlook Strong } Neutral } Strong Asset Allocation Investor fear is subsiding and risk-on sentiment should continue Bonds Stocks Equities Region US stocks are favored over non-US US Int’l Opportunities in emerging markets are growing Developed Emerging Market Cap Rally in equities may lead shift to small caps Small Large Style Modest economic activity favors growth styles for the moment Value Growth Fixed Income Duration Further rate increases warrant short positioning Short Long Quality Lower-quality bias remains given positive data trend High Low Stay at neutral with rising rate risks in developed vs. policy Region Developed Emerging cuts in emerging Commodities Insured • May Lose Value • No Bank Guarantee Not FDIC Currencies Commodities Oil and gold prices may soften with strengthening dollar Underweight Overweight US economic improvement favors USD vs. other developed Currencies US Foreign market currencies
  2. 2. Equity Market OutlookAt this point, it looks like US economic The overall economic and market backdrop has continued to improve over the pastgrowth will average somewhere around three months and investors are increasingly becoming more comfortable moving backthe 2.5% level for all of 2012, which is into higher-risk asset classes. The economy has certainly not entered into robusthardly stellar, but good enough to help expansion mode, nor is it likely to do so any time soon, but growth has been accelerating.equity markets extend their gains. The labor market in particular has been improving, a critical factor that is helping to make the current economic expansion self-sustaining. At this point, it looks like US economic growth will average somewhere around the 2.5% level for all of 2012, which is hardly stellar, but good enough to help equity markets extend their gains. In addition to the economic backdrop, monetary policy remains market-friendly, and while the chances of an additional round of quantitative easing from the Federal Reserve have diminished to near-zero, the Fed is committed to keeping rates low for the foreseeable future. At the same time, corporate earnings remain solid (although the pace of growth has slowed compared to last year) and market valuations remain at least reasonable.At some point, we would not be sur- On balance, we believe there is room for further advances in equity prices. At theprised to see some sort of near-term same time, however, we expect the pace of price appreciation to become slower andpullback or correction, but we also more uneven. At some point, we would not be surprised to see some sort of near-termbelieve stock prices will end the year pullback or correction, but we also believe stock prices will end the year higher thanhigher than where they are today. where they are today. Equity Views } main area of focus with regard to the equity market has not changed: We Our favor companies generating high levels of free cash flow, particularly those that have the ability to increase their dividends. Geographically, we continue to favor US over other developed market stocks } and our view toward emerging markets is growing more favorable as investor risk appetite increases. From a sector perspective, healthcare, energy and telecommunications services } remain our favored areas. We are gradually adopting a more favorable view toward financials, but still recommend an overall underweight to that area of the market.Equity Sector Outlook Key = previous quarter = current quarter Strength of Preference Current Outlook Underweight } Neutral } Overweight Healthcare Strong cash flow growth; still the best defensive sector Energy Attractive valuations and good cash flow warrant overweight position Telecom Services Attractive yields, positive cash flows and competitive fundamentals Information Technology Fundamentals mixed; valuations fair; good cash flow Industrials Mixed prospects; retain neutral Consumer Discretionary Mixed trends; mixed valuations Consumer Staples Neutral fundamentals; higher oil prices could hurt Materials Uncertain outlook in a modest growth environment Financials Rising yields could help; cheap valuations Utilities Little prospect for earnings or dividend growth; expensive
  3. 3. Taxable Fixed Income Market OutlookAmid improvements in Europe and a prevailing risk-on sentiment among investors, We continue to recommend underweight-interest rates moved higher to match the brightening macro outlook, as we had ing interest rate risk and overweightingsuggested may occur. While there could be more upward bias, we believe structural credit risk in fixed income portfolios.forces will keep a cap on rates. The market focus has shifted to the next obvious signof strain: oil. Our view is that recent increases reflect less of a supply shock and moreof a normalization in the dollar following easing concerns out of Europe.Our other concern: Can China manage its economic transformation? Over the longerterm, we have serious doubts. In the short term, however, we have no doubt that Chinacan continue to turn up the investment-led spend to keep growth above its recentlyannounced lowered target of 7.5%. A return to a policy of currency depreciation in theface of weakening reserve growth may put downward pressure on gold prices. In thenear term, however, gold remains an effective hedge against continued dollar depreciationand geopolitical risks.Recent dollar strength and the rise in interest rates reflects a downshifting of Income-oriented investors shouldexpectations for further Fed accommodation. We expect only modest increases in consider floating rate loans thatrates for this year as the Fed will maintain its stance despite signs of recent economic provide a high level of income whileimprovement. In such an environment, we continue to recommend underweighting also providing protection againstinterest rate risk and overweighting credit risk in fixed income portfolios. future increases in interest rates.Taxable Fixed Income Views} ith improved economic data reducing the possibility of additional policy stimulus W and increasing investor risk appetites, we expect risk assets will continue to rally.} In the prevailing risk-on environment, investors should increase exposure to credit and reduce Treasuries, but also consider an allocation to inflation protection for longer-term principal preservation. Income-oriented investors should consider floating rate loans that provide a} high level of income while also providing protection against future increases in interest rates.Taxable Fixed Income Sector Outlook Key = previous quarter = current quarter Strength of Preference Current Outlook Underweight } Neutral } Overweight Spreads remain attractive relative to default risks; loans increasingly High Yield attractive on valuation Securitized Assets Attractive yields, but illiquid markets remain a risk Corporates Attractive relative to ongoing financial sector risks Non-US Dollar USD rate increase balanced against Euro sovereign risks valuations Shift to neutral on less attractive spreads and dampened Agency Mortgages expectations for QE3 Risks remain with slowing growth, but policy favors local Emerging Markets currency debt Inflation Protected Preferred over nominal rates, but expensive in absolute terms Treasury/Agency Better opportunities can be found elsewhere
  4. 4. Municipal Market OutlookInterest in munis remains strong as After a strong run, tax-exempt municipal market performance paused recently asinvestors continue to seek out income an increase in issuance prompted supply to better match demand. The fundamentaland capital preservation in their fixed backdrop generally appears healthy, but requires monitoring as budget seasonincome portfolios. approaches and select credit stories begin to capture headlines. Nonetheless, interest in munis remains strong as investors continue to seek out income and capital preservation in their fixed income portfolios. We maintain a neutral duration stance, cognizant that the market is preparing for a period of elevated issuance as states begin to negotiate their 2013 budgets. Given the low absolute rate environment, we expect performance will be driven by yield curve positioning and continued focus on income, and believe an emphasis on capital preservation is important in today’s market. Municipal Market Views } recent market sell off has created better value opportunities. We favor a neutral The duration stance, given the economic upgrade. We continue to favor a barbell approach to yield curve positioning, with exposure to both long and short maturities. } e recommend overweighting state tax-backed and essential service bonds. W } e are less favorable toward land-secured bonds, senior living bonds, bond W insurers, student loans and local tax-backed issues.Municipal Market Positioning Key = previous quarter = current quarter Strength of Preference Current Outlook Strong } Neutral } Strong Duration Retain a neutral duration bias for munis Short Long Yield Curve Favor a barbell approach (i.e., long and short maturities) Short LongThe stated investment preferences are the opinions of the authors and do not reflect individual investor’s risk and return goals. Individual investors should consult with their financial professionalabout how to implement these opinions into a portfolio that is suitable for their goals and risk tolerance. A “Neutral” preference indicates a recommendation that investors should maintain theirlong-term allocation regarding that investment decision. These views do not necessarily reflect the investment decisions made within specific BlackRock portfolios.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 anyinvestment strategy. The opinions expressed are as of April 2, 2012, and may change as subsequent conditions vary. Individual portfolio managers for BlackRock may have opinions and/ormake investment decisions that, in certain respects, may not be consistent with the information contained in this report. The information and opinions contained in this material are derived fromproprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of futureresults. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. Stock andbond values fluctuate in price so that the value of an investment can go down depending on market conditions. International investing involves additional risks, including risks related to foreigncurrency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are typically heightened forinvestments in emerging markets. Investments in the natural resources industries can be significantly affected by events relating to those industries, such as variations in the commodities markets,weather, disease, embargoes, international, political and economic developments, the success of exploration projects, tax and other government regulations, as well as other factors. The twomain risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refersto the possibility that the issuer of the bond will not be able to make principal and interest payments. There may be less information available on the financial condition of issuers of municipalsecurities than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. A portion of the income from municipal securities may be taxable. Someinvestors may be subject to Alternative Minimum Tax (AMT). Capital gains distributions on municipal securities, if any, are taxable.You should consider the investment objectives, risks, charges and expenses of any fund carefully before investing. The funds’prospectuses and, if available, the summary prospectuses contain this and other information about the funds, and are available,along with information on other BlackRock funds by calling 800-882-0052 or from your financial professional. The prospectusesand, if available, the summary prospectuses should be read carefully before investing.FOR MORE INFORMATION:©2012 BlackRock, Inc. All Rights Reserved. BLACKROCK, BLACKROCK SOLUTIONS, ALADDIN, iSHARES, LIFEPATH, SO WHAT DO I DOWITH MY MONEY, INVESTING FOR A NEW WORLD and BUILT FOR THESE TIMES are registered and unregistered trademarks of BlackRock, Inc.or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.Prepared by BlackRock Investments, LLC, member FINRA. Not FDIC Insured • May Lose Value • No Bank GuaranteeLit. No. INV-DIRECTIONS-0312 AC6067B-0312 / USR-0170