/Spring forward: 5 themes for the coming months

Spring forward: 5 themes for the coming months

Tired of winter? Never fear: Once again, spring is near. For all of us, it is a time of growth, renewal and restoration. For investors it is also time to take stock of whether they are on course, or to identify potential storms that may lie ahead.

Although markets in 2019 have enjoyed a healthy start to the year, concerns over slowing growth, economic and earnings outlooks, and U.S.-China and European political risks are ever-present. As the iShares Investment Strategy team discusses in the Spring Investment Directions, investors should begin to consider defensive exposures.

Our take on the five major themes for this quarter:

1. In U.S. equities consider the healthy healthcare sector.

In an environment of slowing growth and less certain earnings outlooks, the resilient earnings growth of healthcare stocks are appealing. Plus, valuations broadly look reasonable compared to historical levels. Tactical investors may consider getting more granular by focusing on exposure to the medical devices industry.Relative value: Trailing 12-month earnings per share

2. As leaders decide what’s next for Brexit, stay underweight U.K. and European stocks.

With Theresa May’s Brexit plan resoundingly defeated, she must now renegotiate a deal. We believe the United Kingdom is likely to avoid a hard exit with an extension of the March 29 deadline to exit and gain time to draft a passable proposal. But lingering uncertainty is likely to keep U.K. assets under pressure while a deeper slowdown in European and global growth only accentuates the challenges. We remain underweight U.K. and European equities.

3. Despite a bad 2018, China is looking ahead.

Although Chinese equities tumbled in 2018, we continue to favor China as well as emerging markets overall. Although trade tensions are likely to persist, we believe frictions will subside in the short run. And we find trade tensions are reasonably priced into Chinese equities. Meanwhile, accommodative policy measures and sustained earnings growth in China could lift investor sentiment.

4. Remember: Ballast matters with bonds.

In 2018, investors were rightly concerned about duration risk as interest rates rose due to Fed tightening, inflation fears and rising deficits. But during December’s equity sell-off, yields fell—long-duration U.S. Treasuries (as measured by the ICE U.S. Treasury 20+ Year Index) returned +5.6% [1]—a stark reminder of the key role bonds can play as a diversifier in a portfolio. We favor holding long duration Treasuries and highly rated investment grade bonds for this purpose.

5. Factors: Momentum on defense, quality is diverging.

Our outlook for momentum has declined to a moderate overweight; it remains attractive, but its relative strength has markedly weakened from the strong levels seen since fourth quarter 2016. Our outlook for minimum volatility has improved from moderately underweight to moderately overweight this quarter and we have downgraded quality from moderately overweight back to neutral. We remain neutral on value, and underweight size.

Funds to consider

iShares U.S. Healthcare ETF (IYH)

iShares U.S. Medical Devices ETF (IHI)

iShares MSCI United Kingdom ETF (EWU)

iShares China Large-Cap ETF (FXI)

iShares MSCI China ETF (MCHI)

iShares 20+ Year Treasury Bond ETF (TLT)

iShares Long-term Corporate Bond (IGLB)

iShares Edge MSCI USA Momentum Factor ETF (MTUM)

iShares Edge MSCI USA Quality Factor (QUAL)

Chris Dhanraj is the Head of the iShares Investment Strategy team and a regular contributor to The Blog.

1) Source: Bloomberg. As of February 15, 2019.

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