Investing opportunities to consider before the second half

Markets today are characterized byĀ low returnsĀ andĀ lots of ā€œme-tooā€ trades, but it’s important to remember low return doesn’t mean no-return. So where do we see opportunities?

My colleagues and I mention a few in our recentĀ BlackRock Investment InstituteĀ publication ā€œGlobal Investment Outlook: Q2 2016.ā€ Here’s a quick look at four in particular to consider before the second half.

1. U.S. stocks, particularly dividend growers.Ā Equities look attractive versus government debt, recently offering dividend yields above the yield on 10-year government bonds in all major markets, based on an analysis using MSCI index data. The gap is widest in negative-rate countries such asĀ JapanĀ and Switzerland. The U.S. is the only major region where bond yields rival equity dividends, though it’s important to remember that there’s no guarantee stocks will continue to pay dividends. We like dividend growers here, and see strength in consumption and housing supporting equities overall. We see peak margins and payout ratios limiting returns, however.

2. European stocks.We also favor European equities due to a supportive European Central Bank (ECB) and reasonable valuations. Weak growth, a challenged banking system and a potential Brexit are risks, however. Domestic U.K. equities look most vulnerable to Brexit fears.

3. U.S. municipals.Ā U.S. municipal debt looks attractive against other bond sectors, and we see potential for inflows after munis’ recent strong performance. The sector’s tax-exempt status is another plus, and munis are a portfolio diversifier, with negative correlations to equities and high yield, our analysis shows. Finally, munis also have been the least volatile fixed income sector, based on daily moves in the past three years.

Within the sector, we favor revenue bonds backed by revenue streams such as water or sewer utilities over general obligation debt that is vulnerable to local pension deficits. We also favor selected exposure to high yield munis, except those of troubled Puerto Rico.

4. Developed market bonds ex U.S.Ā BothĀ sovereignsĀ and credit outside the U.S. are underpinned by very easy monetary policies. SlowingĀ Fed normalizationĀ is checking the dollar’s rise, supporting returns on non-USD bonds. For income investors, we favor longer-dated peripheral European sovereigns such as Spain and Portugal, which offer a yield advantage over Germany.

Read more about these opportunities, and our views across asset classes, inĀ my other posts.

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

Photo credit: kenkuza / Shutterstock

Ā Copyright Ā© Blackrock
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