Why now may be the moment to get in on value

Watch

The market’s almost immediate plunge to start 2016 cast a pall over what might have been shiny prospects for a new year, just two weeks from the Fed’s “balanced” assessment of U.S. economic conditions and the first rate hike in nearly nine years.

Often forgotten in the doom and gloom is that volatility means down … and up.

What intrigues me as a 30+ year value investor is that value stocks have been among the most volatile. And that seemingly has sent investors packing. At the end of 2015, there was $2.7 trillion in growth mutual funds, almost double the $1.5 trillion invested in value mutual funds.

This underallocation to value stocks could mean missed opportunity. Let’s look at a hypothetical $10,000 investment in growth, core and value segments over the last decade. We can see where an investor might have missed out in this case.

Value Growth

Opportunity in the making

We believe the recent overallocation to and performance strength in momentum and growth sets the stage for investor rebalancing. While the long-term path to value outperformance is not a straight line, and may be marked by alternating spates of value and growth leadership, we fully expect that investors are going to want and need to re-allocate back to value in their portfolios.

As shown below, some of the periods of greatest value underperformance are followed by some of the most significant periods of outperformance. While the timing is impossible to predict, it’s not too great a leap to suggest we may be setting up for a rotation in favor of value stocks.

Value Swing

Actively seeking value

Beginning in August of last year, the market began to price in weakening global economic conditions. The bearishness tightened its grip in the fourth quarter and early 2016 and, as a result, we saw defensive stocks bid up to very full prices as value stocks got cheaper.

It seems clear to me that the heightened volatility over this period has created attractive valuations in certain areas of the market. Indeed, by producing dislocations in the market, volatility effectively separates the potential stock winners of the future from underperformers.

As the chart below shows, the valuation spreads within sectors are wider than their long-term historic average in many areas of the market. The greater the controversy in the investment case, the greater the dispersion in valuation. That means some stocks are priced low and others high. We are seeing that most acutely in the energy sector.

Valuation Sectors

But buyer beware: Determining which of those low-priced names are true bargains and which are priced low for good reason requires deep understanding of each industry and company.

While we approach the market stock by stock, certain areas seem riper for the picking now:

Banks. We see banks as less volatile than they have been in the not-too-distant past, characterized by stronger balance sheets and less volatile results. Yet, they are trading at lower valuations.

Energy. The key questions here are: 1) when will oil prices bottom and 2) how high will oil prices go in a recovery? We lean to the optimistic side on both. We think oil prices could bottom in the second quarter and head up in the second half of 2016. And while the consensus sees oil recovering to $50-$60 a barrel, our year-end estimate is above $75. But selectivity is important. An investor grab for high-quality, low-risk stocks without regard for valuation or risk/reward has created some attractive long-term opportunities elsewhere in the sector, but a number of stocks in this sector will continue to underperform.

Technology. By our analysis, large-cap tech stocks with high return on invested capital are trading at cheap valuations relative to both their history and the broader market, while also generating solid cash. The significant cash balances allow flexibility, and the recent price declines of fast-growing companies may create attractive merger-and-acquisition opportunities.

Health care. Despite current market fears, we’ve found a number of interesting stocks that are attractively priced relative to history and compared to the broader market. Health care also exhibits better growth and is cheaper than other defensive sectors, such as consumer staples and utilities. The sector benefits from favorable demographic tailwinds (namely, the aging of the population) and continued innovation.

Of course, this only scratches the surface. My colleagues and I are excited about the opportunity ahead. Our objective is to work from the bottom up (starting with the individual stocks) to find compelling investment opportunities that are mispriced by the market over a two- to three-year time horizon. We believe the current environment is wildly conducive to that.

While we acknowledge China’s overcapacity and economic weakness, we believe the market was overzealous in pricing in the probability of a U.S. recession. In fact, February and early March have shown a reversal in pessimism … and in markets. This has created some attractive investment opportunities. In our assessment, the period of underperformance has produced some bargains and sets the stage for a rebalancing in favor of value.

Bart Geer is a portfolio manager and head of BlackRock’s Basic Value Team.

 

Investment involves risk. Stock and bond values fluctuate in price so the value of your investment can go down depending on market conditions. International investing involves additional risks including, but not limited to, risks related to political events, currency fluctuations, illiquidity and volatility. These risks may be heightened for investments in emerging markets.

Please consider the investment objectives, risks, charges and expenses of the fund carefully before investing. The prospectus and, if available, the summary prospectus contain this and other information about the fund and are available, along with information on other BlackRock funds, by calling 800-882-0052 or from your financial professional. The prospectus should be read carefully before investing.

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 March 2016, and may change as subsequent conditions vary. The information and opinions contained in this material 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. There is no guarantee that any forecasts made will come to pass. Any investments named within this material may not necessarily be held in any accounts managed by BlackRock. Reliance upon information in this material is at the sole discretion of the reader. BlackRock makes no representations or warranties regarding the advisability of investing in any product or service offered by CircleBlack. BlackRock has no obligation or liability in connection with the operation, marketing, trading or sale of any product or service offered by CircleBlack.

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How to Think About the Biggest Risks

Dice

Last week the Economist Intelligence Unit, the research division of the company that owns the magazine The Economist, released the latest version of its global risk assessment. The list made headlines because it included a certain former reality TV star and Republican presidential candidate among the “top 10 global risks” alongside things like terrorism and a Chinese economic collapse. But beyond the fact that attaching the words “Donald” and “Trump” to anything seems to make it newsworthy, what can investors learn from this list of global risks?

The main takeaway is the importance of political risk, a concept referring to political changes that can affect the value of your investments. While a few items (such as currency volatility and investment in the oil industry) are economic risks, most of the EIU’s list relates to politics and government policies. These include Russian military adventurism in Ukraine and the Middle East and the possibility that the United Kingdom will leave the European Union. As we’ve noted in the past, there’s evidence that political risk has been rising in recent years, and the EIU’s focus on such risks affirms that conclusion.

The prevalence of political risk suggests that investors should be wary of concentrating too much of their portfolio in any one part of the world. Even if the region’s economic potential offers the possibility of high investment returns, politics can interfere. But that doesn’t mean that fearful investors should avoid having international investments in their portfolio. After all, as the tumult of the current US presidential campaign shows, the next market-rattling political risk could be in United States.

Furthermore, trying to avoid risks altogether is generally a recipe for poor investment performance. Taking on risk is what creates the possibility of earning more than meager returns on your investments, and political risk is no exception. Rather than trying to completely avoid political risks, a better approach is to manage them. That means understanding the political risks your portfolio is exposed to, verifying that you’re comfortable with how much they can affect your wealth, and diversifying to ensure that any one risk can’t cause too much pain.

The Persistence of Low Bond Yields

10Y US Treasury Yield 3-16

As the Federal Reserve prepared to raise interest rates last year, fears were rampant that rising interest rates would hurt bond investments by driving up bond yields (bond prices and bond yields move in opposite directions). Yet bond yields have actually declined since the Fed took action in December. Even after a recent uptick amid receding fears of a global recession the yield on 10-year treasury bonds is below 2%, a very low level by historical standards. Should investors still be concerned about rising bond yields?

There’s no immutable law of economics saying that bond yields have to rise back to what historically have been more “normal” levels. The yield on 10-year Japanese government bonds has been below 2% since the late 1990’s, and it’s now below 0% (that’s not a typo; it’s actually negative). Some of the factors that have contributed to these persistent low yields, such as Japan’s aging population, are starting to affect the US and other countries as well.

That doesn’t mean perpetual low bond yields are a certainty. Faster economic growth or a higher inflation rate could push bond yields up, and there are some signs that these trends could be starting to develop. The US economy has added an average of more than 250,000 jobs per month over the past 5 months, and there have recently been indications that inflation, long dormant, may be starting to come back to life.

But even if bond yields do rise from their current levels, they’re unlikely to soar. The global economy is still weak, and the inflation rate, though rising, is still well below the Fed’s 2% target. Furthermore the downward pressure on bond yields from the aging population is likely to continue. Yields may be very low by historical standards, don’t be shocked if they stay that way a while longer.

Preparing for the Return of Volatility

Plant

Although markets have been relatively stable the last couple of weeks, that doesn’t necessarily mean the turbulence we’ve seen this year is behind us. After all, the catalysts for the volatility we saw in January and February are still here: excess supply putting pressure on oil prices, disappointing earnings, and slowing global growth. Add to this a highly unusual election season in the U.S. and uncertainty surrounding China and the stage is set for volatility to remain with us in 2016.

In times like these, the temptation for investors is strong to run to the sidelines and exit the market. But it is very difficult to time the market and miss out on rallies if – or when – they occur. Instead, look for potential opportunities that may help strengthen a portfolio, and seek some stability and growth in these constantly changing markets.

Specifically, here are three actions to consider in these markets:

Seek ballast with short duration bonds

Shorter duration bonds, or bonds that mature within three years, can potentially offer a portfolio stability during market volatility. Historically, we have seen short duration bonds have a lower correlation to stocks, which can be a beneficial ballast when equity markets are down. Additionally, bonds typically generate regular income for investors, which can potentially help stabilize portfolios when equity markets decline.

Focus on high quality companies with growth – or income – potential

As volatility increases and returns are harder to come by, investors should consider looking to high quality companies, which may be better positioned in this difficult environment, as well as dividend growers, which potentially may offer steady income. When we say “high quality” companies, we are referring to companies characterized by high profitability, steady earnings, and low leverage. This may seem obvious, but we are looking for financially healthy companies that can weather the markets and volatility. Additionally, exposure to companies that have the potential to sustainably increase dividends over time may be an opportunity to target steady growth – as well as income that can help provide some buffer from volatility.

Look for growth opportunity abroad

Despite slowing global growth, there are attractive potential opportunities outside the U.S. For example, Japanese stocks continue to offer relative attractive valuations, especially in comparison to other developed markets. Additionally we believe the Bank of Japan will continue to deliver market-friendly monetary easing policies in 2016 similar to the stimulus from QE and shareholder-friendly activities we saw in 2015.

Overall, we expect volatility to be ongoing throughout 2016, making it potentially a more difficult environment for investors. But it is important to keep it in perspective, focus on your long-term objectives without fleeing to the sidelines at the worst moment, and keep an eye out both for opportunities – as well as ways to strengthen your portfolio.

Exchange traded funds (ETFs), such as the iShares Short Maturity Bond ETF (NEAR), the iShares MSCI USA Quality Factor ETF (QUAL), the iShares Core Dividend Growth ETF (DGRO), and the iShares MSCI Japan ETF (EWJ), can provide access to short duration bonds, high quality companies, and Japan.

Heidi Richardson is a Global Investment Strategist at BlackRock. She is also Head of Investment Strategy for U.S. iShares.

 

Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets and in concentrations of single countries.

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.

The iShares Short Maturity Bond ETF will invest in privately issued securities that have not been registered under the Securities Act of 1933 and as a result are subject to legal restrictions on resale. Privately issued securities are not traded on established markets and may be illiquid, difficult to value and subject to wide fluctuations in value. Delay or difficulty in selling such securities may result in a loss to the iShares Short Maturity Bond ETF.  The fund may invest in asset-backed (“ABS”) and mortgage-backed securities (“MBS”) which are subject to credit, prepayment and extension risk, and react differently to changes in interest rates than other bonds. Small movements in interest rates may quickly reduce the value of certain ABS and MBS. NEAR is an actively managed fund and does not seek to replicate the performance of a specified index. Actively managed funds may have higher portfolio turnover than index funds.

There can be no assurance that performance will be enhanced for funds 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, a fund may seek to maintain exposure to the targeted investment factors and not adjust to target different factors, which could result in losses. There is no guarantee that any fund will pay dividends.

This material represents an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective. The information presented does not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy or investment decision.

This document contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

BlackRock makes no representations or warranties regarding the advisability of investing in any product or service offered by CircleBlack. BlackRock has no obligation or liability in connection with the operation, marketing, trading or sale of any product or service offered by CircleBlack.

©2016 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owners.

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It’s Not Too Late for a 2015 IRA Contribution

Piggy Bank 2

Taking advantage of tax-advantaged accounts, such as 401(k) and IRA accounts, can be one of the most effective tactics to get on track to reach your retirement goal. But if you forgot to make an IRA contribution for the 2015 tax year, it’s not too late. Even though the calendar year is over, you actually have until tax day (April 15th) of this year to make an IRA contribution for 2015.

Like with most issues relating to taxes, the rules relating to IRA contributions aren’t exactly simple. But here are the basics:

– The yearly contribution limit into IRA accounts for anyone under the age of 50 is $5,500. For those 50 and over, the contribution limit is $6,500. Those are the limits for all your IRA accounts combined, so you can’t contribute $5,500 each to two different IRA accounts in the same year.

– For traditional IRA accounts (where your initial contribution is generally tax-deductible but you pay taxes when you withdraw the money in retirement), whether you can get the tax benefits from the IRA depend on whether you (or your spouse) are covered by a retirement plan at work as well as how high your income is.

– For Roth IRA accounts (where your initial contribution isn’t tax-deductible but you don’t pay taxes when you withdraw the money in retirement), whether you can contribute depends on your income.  You can make a Roth IRA contribution up to the limit if your tax filing status is “single” and your income is less than $116,000, or if your tax filing status is “married filing jointly” and your income is less than $183,000.

You can find more details on the IRA contribution rules on the IRS website.

5 Simple Steps for Setting Smart Investing Goals

Smart

One of my favorite mantras that I’ve carried over from my days as a financial advisor is that it’s not always what you own, but why you own it, that counts.

We live in a world where there are countless options when it comes to investing, from individual stocks and bonds to exchange traded funds (ETFs) and more. We all appreciate having a wide variety of choices, but sensory overload sets in fast if you don’t have a goal in mind. A random collection of investments does not an investing plan make.

This is where investing with a purpose comes in handy. For example, I am admittedly somewhat delinquent when it comes to figuring out how I want to allocate my daughters’ 529 plans. I think it stems from the fact that they’re growing up much too fast. However, the thing that motivates me to put a plan in place is knowing that I’m investing for their future, laying the groundwork for their education. This makes the investment selection process much easier — I just have to keep focusing on the end goal.

Steps to Stay Focused: SMART

I modified a well-known management acronym, SMART, to fit my investing goal setting guidelines. Here’s the breakdown:

SPECIFIC

Write down your goals. Have you ever noticed that anticipating the packing process for a business trip can be somewhat stressful, but the minute you write down a list of what you need to bring, it seems a bit less daunting? It works the same way for your investments. Jotting down “Retirement at Age 70” or “Help Ava Pay for College” gives you a tangible objective.

MEASURABLE

You need to have a way to quantify your progress. Similar to those fundraising thermometers that you see at PTA meetings, it’s figuring out how much further you have to go to reach your goal is easier when you have a visual. Calculating that you’ll need to set aside X for the next Y years — then setting up automatic transactions so you don’t even notice — makes this a manageable process.

ASK

When in doubt, find someone who can help you. No one expects you to be an expert investor overnight, and resources abound. Whether it’s your money-savvy cousin who has already put two kids through college and knows 529 plans like the back of her hand, or a trusted financial advisor, it never hurts to get an objective opinion from someone with experience.

RESPONSIBLE 

While you can automate payroll deductions to pad your 401(k), it’s not a good idea to set and forget your investments. The market will move up and down, and from time to time you’ll have to regroup. This doesn’t mean having a knee-jerk reaction every time the market fluctuates, but planning for taxes and rebalancing at the end of each year.

TRANSPARENT

I told my clients time and again that the worst thing you can do is be close-lipped about your plans among others, especially family. If you’re planning for retirement, be open and honest about your situation with your loved ones. Make sure they know what your plans are in the event something happens to you.

A good way to get started on your path as a smart investor is to take advantage of social calendar reminders, like checking your 401(k) when you change your clock for daylight savings. Here are some helpful hints.

Heather Pelant is Head of BlackRock Personal Investing for BlackRock. She is a regular contributor to The Blog.

 

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 the date indicated 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 of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader. BlackRock makes no representations or warranties regarding the advisability of investing in any product or service offered by CircleBlack. BlackRock has no obligation or liability in connection with the operation, marketing, trading or sale of any product or service offered by CircleBlack.

©2016 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owners.

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