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Friday, February 12, 2016

2 Opportunities Amid Today’s Market Volatility

fabrikasimf / Shutterstock

fabrikasimf / Shutterstock

2016 has come in like a lion, at least with regards to stock market volatility. Many of the same factors that sparked a rockier road in the second half of 2015, including declining oil prices and an economic slowdown in China, have been roiling markets so far this year.

Indeed, according to Bloomberg data, volatility as measured by the VIX index, is now at levels last seen early last fall, after China's "Black Monday" stock market crash rattled global markets. Looking forward, we believe the volatility is likely here to stay.

Beyond concerns about commodities and global growth, markets are also struggling with falling earnings, tighter financial conditions, tighter liquidity and accelerating credit downgrades. In addition, with geopolitics taking stage and many currencies outside of the U.S. devaluing, I see few catalysts for a change in sentiment over the shorter term.

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Places to find potential growth 

But while there are certainly reasons for investors to be cautious in 2016, the choppy road isn't necessarily a reason to run to the sidelines. I believe there still are attractive market opportunities offering potential growth. So, as you prepare your portfolio for the volatility ahead, here are two investing ideas to consider.

Europe. In Europe, the European Central Bank (ECB) recently reiterated its willingness to ease monetary conditions further to stimulate economic growth, possibly as early as its next policy meeting in March. Indeed, according to the central bank's recently released meeting minutes, there's a desire from some ECB members to execute even deeper cuts in their deposit rate, already in negative territory.

In other words, Europe remains squarely in a monetary easing cycle, which is jump starting the region's credit growth and overall business cycles. This environment created a tailwind for Europe's equity markets in 2015, and I expect it will continue to help the region's stocks in 2016.

Japan. The Japanese market is a similar story. Stocks in Japan benefited last year from continued easy money from the Bank of Japan (BOJ), and I see sustained monetary policy easing continuing to support the market going forward in 2016. Additionally, corporate governance reform could continue to improve shareholder returns in Japan into 2016.

To be sure, these markets aren't without risks for U.S. investors, including currency risk. While I expect the yen to continue trading in a very narrow trading range, the euro could decline further, considering that the ECB is in the early innings of its stimulus program. So I advocate U.S.-based investors consider hedging their euro exposure.

Last year, this approach seemed to work. According to Bloomberg data, the MSCI Japan and MSCI EMU 100% USD Hedged Index both outperformed the MSCI ACWI in 2015, delivering 7.6 percent and 4.9 percent respectively, both well above the ACWI index's -3.7 percent return. And I believe this approach could work in 2016 too.

Overall, I see 2016 bringing more of what we saw in 2015, namely increased volatility and the need for investors to be selective in their search for growth and stability. It's clear that news about oil prices and China's growth can quickly create a "risk-off" environment that impacts markets globally. For now, I see growth potential in Europe and Japan, and as I see additional opportunities develop, I'll be sure to write about them here.

For more on my current market views and how to take action, visit iShares.com/iThinking.

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

Investing involves risk, including possible loss of principal.

Index returns are for illustrative purposes only. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. Index returns do not represent actual iShares Fund performance.  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.

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.

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Disclosure:

 All trades, patterns, charts, systems, etc. discussed in the product materials are for illustrative purposes only and not to be construed as specific advisory recommendations. All ideas and material presented are entirely those of the author and do not necessarily reflect a specific recommendation or compensation by any advertiser or by this Website.

Sincerely;

                 Mr. Peter Casula Jr


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3 Charts All Investors Should See




In the space of just a few weeks, 2016 has already achieved several distinctions: worst ever start to a year for equities, a 20 percent decline in Chinese stocks and the lowest oil prices in well over a decade, according to Bloomberg data.

Given the abysmal start to the year, the defining question is whether this is another painful but temporary correction, or the start of a bear market. For now, I still lean toward the former.

That said the coordinated slowdown in global manufacturing, decline in earnings and deterioration in credit markets raises the risk of a more severe downturn. With that in mind, here are three charts to watch in assessing whether a bear market could be ahead.

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Global Manufacturing Activity

While services are stable and account for a growing share of overall economic activity, manufacturing is struggling in most countries, including the United States, as the chart below shows. This is problematic for several reasons. First, manufacturing data, particularly new orders components, are key leading indicators. Companies are quick to cut back when they expect demand to fall. As such, measures such as the Purchasing Managers Index (PMI) and the ISM new orders component typically lead economic activity by one to two quarters.

Another reason to watch the manufacturing numbers, particularly in the United States, is that the high yield market has a heavy weighting toward "old economy" companies. So, even if the broader economy is growing, a contracting manufacturing sector and falling capital spending could disproportionately hurt U.S. credit market conditions.

manu

Earnings Revisions

Along with a contracting manufacturing sector and sluggish growth, Bloomberg data show we're seeing the worst corporate earnings revisions since 2009. As I've discussed before, the U.S. is already in an earnings recession. While this would always be problematic, it's even more challenging now given that U.S. valuations are still elevated. In addition, the Federal Reserve (Fed) is now tightening, and easing by other central banks isn't having the same impact as previous efforts. In the absence of a significant expansion of monetary accommodation by the European Central Bank (ECB) or Bank of Japan (BOJ), market multiples are unlikely to expand. In other words, any further equity market gains will need to be driven by higher earnings. So far, as the chart below shows, we're seeing the opposite.

earnings

Credit Spreads

While China may have been the catalyst for the latest market volatility, credit market conditions have been deteriorating for 18 months, as evident in the chart below. U.S. high yield spreads are now more than double their trough levels from mid-2014, according to data accessible via Bloomberg. The widening of spreads and accompanying tightening in financial market conditions have contributed to the shift in the volatility regime. Should credit spreads continue to widen, particularly outside the already crushed energy space, this will arguably lead to more volatility and also raise more fundamental questions as to the health of the global economy.

credit

For now, the bulk of evidence is still mildly positive. Most leading indicators are signaling an expansion, and the recent widening of spreads appears to already discount a likely spike in energy and material-related issue defaults. However, be sure to keep tabs on these charts going forward. Further deterioration in one or more of these measures would raise the odds of a more severe correction and potentially a more pronounced slowdown in the global economy.

 

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The Blog.

 

Disclosure:

 All trades, patterns, charts, systems, etc. discussed in the product materials are for illustrative purposes only and not to be construed as specific advisory recommendations. All ideas and material presented are entirely those of the author and do not necessarily reflect a specific recommendation or compensation by any advertiser or by this Website.

Sincerely;

                 Mr. Peter Casula Jr

Sent from my iPad