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BlackRock: six important investment ideas

BlackRock's chief investment strategist Richard Turnill offers some investment food for thought for the rest of 2017.  

It's not too late

As we enter the fourth quarter, BlackRock global chief investment strategist Richard Turnill (pictured) shares some investment ideas for the final few months of the year.

'It’s not too late to prepare portfolios for the remainder of 2017,' Turnill says.

'We see three key interrelated themes shaping economies and markets over the next three months: sustained global economic expansion and the need to rethink both returns and risk. How should investors prepare portfolios for this environment?

Click through to see Turnill's six investment ideas to see out 2017.

Favor equities over fixed income, and think globally

'Steady economic expansion and strong earnings growth bode well for equities. The sustained global expansion is providing a positive backdrop for corporate earnings. Earnings are growing at a faster than 10% pace in all major regions for the first time since 2005, excluding the post-crisis bounce, our research shows.

'We favor non-US markets, including Europe and Japan, and we are bullish on emerging market (EM) stocks, even after a strong rally this year. Europe is sustaining above-trend economic expansion. Japan has seen a jump in earnings expectations. And economic reform momentum, improving cash flows and reasonable valuations make a solid investment case for EM equities.'

Consider technology and US banks

'This year’s top sector also holds appeal: Tech has posted outsized earnings growth and accounted for roughly half of US and EM Asia equity returns.We still see ample runway

'We also like US bank stocks, with steeper yield curves set to boost lending margins, and prospects for deregulation and increased payouts.'

Don’t forget about factors

'We particularly like the momentum and value equity style factors. Momentum in developed markets has more upside potential, we believe, as it tends to do well in expansionary periods.

'Value could benefit amid a solid macro backdrop and improved investor sentiment. Caution has kept investors away from discounted segments of the market. [But] a sentiment shift, underpinned by confidence in the sustained global expansion, could help value add to strong third-quarter returns, we believe.'

Look to credit for income in a low-yield world

Yes, credit spreads are close to historically tight levels. Yet we believe credit is an attractive source of income — and one seeing persistent demand in the context of a low-yield fixed income universe. Today’s valuations imply future returns will come from clipping coupons (carry) rather than tightening spreads.

'As a result, we believe credit offers less upside than equities on a risk-adjusted basis if our scenario of sustained global expansion pans out. But this environment of low market and economic volatility is one where corporate defaults are expected to be limited. In the US, we prefer an up-in-quality stance. In Europe, we like earning spread in supranational, covered and subordinated financial bonds.

Embrace opportunities in EM debt

'We like selected EM debt for income and potential price appreciation amid low inflation and subdued currency volatility in the emerging world. EM debt also gleans support from synchronized global growth, buoyant commodity prices and global investor thirst for yield.

'Unlike developed market (DM) central banks, many EM counterparts have room to cut rates given a backdrop of steady growth and subdued inflation. This should lead to a further narrowing of interest rate differentials versus the rest of the world as the Federal Reserve leads its DM peers in normalization. We expect relative price outperformance in EM debt as a result.

'Stronger EM currencies have boosted the performance of EM local-currency debt this year. We see the US dollar appreciating only modestly and gradually — and not diluting the EM investment case.'

'So what are the main risks? A stalling of global growth momentum, a yield spike caused by slowing monetary stimulus, or a rapidly resurging dollar.'

Consider government bonds for ballast

'We expect interest rates to rise, as US and eurozone monetary policies gradually normalize, though structural factors and further central bank divergence are likely to keep a lid on rates.

'The implications of moderately higher rates: Expect low or negative returns for government bonds globally in the medium term. Yet long-term government bonds are useful diversifiers against volatility and equity market selloffs sparked by geopolitical risks. We advocate a strategic allocation to government bonds, despite their low potential returns, for this reason.'

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