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A Look Back at 2011s Calls
by Russ Koesterich of iShares Blog,
Last December, Russ shared his economic forecast for 2011, along with a series of investment calls. Nearly every Monday since then, he has highlighted certain asset classes and market sectors in his weekly call posts. So, how did his calls perform? Read more to find out.
Backing Brazil and Avoiding Indian Inflation
by Russ Koesterich of iShares,
In his latest video installment, iShares Chief Investment Strategist Russ Koesterich takes investors to Latin America and to explain why Brazil is his favorite spot in the region. But for investors who might be interested in India, Russ has some words of caution.
Where Falling Inflation Means Rising Valuations
by Russ Koesterich of iShares Blog,
Emerging market inflation should decelerate further in 2012 thanks to a combination of continuing slower global growth and the lagged impact of monetary tightening. With the outlook for emerging market inflation improving, my team recently ran an analysis to determine which developing countries are likely to see their valuations benefit the most from falling inflation. Here is the list, with each country ranked in order of how much they should benefit. 1. Brazil 2. India 3. Egypt 4. South Africa 5. Russia 6. Turkey.
A Top Sector Pick for 2012
by Russ Koesterich of iShares,
With 2011 winding down, it is time to think about positioning your portfolio for the New Year. In this video, Russ Koesterich, iShares Global Chief Investment Strategist, explains why energy is his favorite sector for 2012. He also gives three reasons why investors should approach the utilities sector with caution.
Whats Driving Markets These Days? Not Economic Data
by Russ Koesterich of iShares Blog,
Despite generally better-than-expected economic data and a good earnings season, stocks remain stuck in the same trading range theyve been in since the summer. The reason: Political developments continue to trump economic ones. For much of the year investors, including myself, have been surprised and mystified at how political events have unfolded in the United States and Europe. Policy decisions have become harder to predict and are being motivated by domestic political considerations. And increasingly, they are driving how markets perform.
The European Overhang and Odds of a Meltdown
by Russ Koesterich of iShares Blog,
Earlier this week, I noted that very elevated Italian and Spanish bond yields remaina short-term risk for both the European and global economies.Several other major European-related risks also continue to threaten markets.1)In the short-term, a key risk remains European banks. While bank funding needs have been addressed by European leaders, capital adequacy still is an issue. 2)A broader risk remains in the form of the interplay between economic policy and domestic politics. In efforts to solve Europes debt problems, domestic political considerations have too often trumped economics.
4 Portfolio Moves for a Long-Term European Debt Crisis
by Russ Koesterich of iShares Blog,
In recent weeks, governments around the world have stepped up efforts to solve the European debt crisis. While Russ believes European leaders will address the outstanding issues in time to avoid a sovereign debt collapse, here are four investing ideas to consider if you expect the crisis to drag on. 1. Within your international equity exposure, overweight CASSH countries. 2. Within your international equity exposure, overweight emerging markets outside of Europe. 3.) Overweight safe-haven assets. And 4.) Within fixed income, overweight investment grade and munis.
The Cost of (Super Committee) Failure
by Russ Koesterich of iShares Blog,
With the failure of the Congressional super committee, the US economy is now poised to experience a significant slowdown in 2013. Russ explains that given that in 2013 the US economy will very likely still be struggling with the impact of consumer deleveraging and a moribund labor market, the resultant fiscal drag would increase the probability that the United States could tip back into a recession.
The Euro-Recession?
by Russ Koesterich of iShares Blog,
Stocks and the euro rose as efforts heated up to help ease Europes debt crisis. Germany and France increased a drive for coercive powers to reject euro zone members budgets that breach EU rules, while a rout of European debt eased on hopes of outside help for Italy and Spain. Despite this progress, a general erosion in confidence coupled with an ongoing deleveraging by the European banks are raising the odds that Europe will experience at least a mild downturn in 2012. For many investors one to two quarters of negative growth now represents the best case scenario for Europe.
Assessing Bank Strength Down Under
by Russ Koesterich of iShares Blog,
Australias strong banking sector is one reason the country is expected to grow faster than larger developed markets. In the 1990s, the Australian government adopted whats called the Four Pillars policy, which prohibits the four big Australian banks from merging or acquiring each other. In this post Russ explains how the countrys Four Pillars policy has helped fuel Aussie banks strength.
3 Reasons Europe is Failing to Act
by Russ Koesterich of iShares Blog,
Its not just US politicians who are failing to adequately address sovereign debt problems. European politicians and policy makers are too. Russ provides three reasons why. 1.Reforms alone arent enough, 2.A lack of firepower and 3.The savior hasnt stepped up. What does this mean for investors? If a politically acceptable solution is not found, Europe risks turning a liquidity problem for smaller peripheral countries into a solvency problem that infects most of the continent. As the European failure to act continues, volatility is likely to remain high in the near term.
The Case for CASSH
by Russ Koesterich of iShares Blog,
Not all developed markets are stuck in a slow-growth environment. Certain smaller developed countries what Russ is calling the CASSH countries appear fundamentally stronger than their larger counterparts. Five countries (Canada, Australia, Singapore, Switzerland and Hong Kong) are likely to hold up much better in the long term than their larger neighbors.
Crafting a Country Call
by Russ Koesterich of iShares Blog,
For nearly a year, Russ has made weekly investment calls about markets across the globe. Heres a quick look at the macroeconomic approach behind his country views and a summary of where his calls now stand. Generally underweight in countries where prevailing macroeconomic conditions cannot explain high or expensive valuations, and he is typically overweight in countries where prevailing macroeconomic conditions cannot explain low or inexpensive valuations.
A Failure to Act
by Russ Koesterich of iShares Blog,
The bipartisan Congressional super committee announced on Monday that it would not be able toreach a deficit-reduction dealin time for its deadline this week. The committees failure will not unleash a near-term economic catastrophe, but it does have four important implications for the US economy: 1. Lower Investor Confidence 2. A Stalled Economy in 2012 3. Fiscal Drag in 2013 and 4. Another Potential Downgrade.
Getting Granular with Emerging Markets
by Russ Koesterich of iShares Blog,
Given todays volatile world, it may be time for investors to adopt a more nuanced approach to investing in emerging markets. Rather than using the traditional frameworks such as emerging markets versus developed markets Im advocating that investors consider creating their international allocation on a country or regional basis. Here are two reasons why.
A Risk Lurking in Octobers Retail Sales
by Russ Koesterich of iShares Blog,
October retail sales are the latest sign that the US economy is likely to avoid another recession and is experiencing what Im calling The Great Idle. But a look behind the retail numbers also reveals a major risk facing the US economy. With unemployment still high and wages growing so slowly that hourly workers are losing purchasing power at the fastest rate in 20 years, you may be wondering where consumers are getting the money to buy new cars or the latest iPhone. It turns out that surprisingly brisk retail spending is being supported by lower savings and by help from the government.
Why US Equities Look Expensive, but Japan Does Not
by Russ Koesterich of iShares Blog,
Im downgrading my view of US equities to neutral from overweight. Since I first initiated an overweight on US stocks last December, large cap US equities have outperformed global equities by roughly 5%. The US has recently become marginally more expensive relative to other countries at the same time that its growth prospects have worsened. Im upgrading my view of Japanese stocks to overweight from neutral given Japans low valuations, better growth prospects and stable risk. This is a value call. Japan currently trades at under book value, down from 1.11 times book value 6 months ago.
Tipping into Recession? Not Yet
by Russ Koesterich of iShares Blog,
If you think this is a bad economy, you havent seen anything yet. Thats what the Economic Cycle Research Institute said on Monday when it warned investors that the US economy is tipping into a recession. But heres why Russ does not agree. As ECRI recently pointed out, recessions can begin in periods of positive GDP growth. Im closely watching a big uncertainty looming over the global economy-whether Europe will be able to resolve its crisis. If Greece does end up defaulting on its debt in a disorderly fashion, then the US economy could end up very well tipping into a recession.
Corporate Bonds: Figuring out a Fair Price
by Russ Koesterich of iShares Blog,
Q: How can you determine if corporate bonds are cheap or expensive? A: By looking at the spreads to Treasury bonds, relative to the state of the economy. Why you should care: Corporate bonds look reasonably priced compared with Treasuries. One way to think about corporate bond valuations is to consider thespread. Investors in corporate bonds are assuming credit risk the risk that the issuer wont repay the principal or make good on an interest payment. Investors are arguably not subject to that risk with a Treasury bond (for all its troubles, the US government has never defaulted).
Who Benefits from Eurozone Progress? Hint: Look North, Not South
by Russ Koesterich of iShares Blog,
Many investors are asking this question as speculation increases that policy makers may be moving closer to containing the crisis. While you might assume the answer would be Italy, Spain or Greece, I have a different take. In short, look to the north, not the south: Perhaps somewhat surprisingly, countries in Northern Europe not directly involved in the sovereign debt crisis will likely benefit disproportionately from any credible progress.
Why Moving to Cash May be a Mistake
by Russ Koesterich of iShares Blog,
ecently, weve all had to contend with political inertia that has bordered on dysfunction on both sides of the Atlantic. In times like these, its not surprising that more and more investors are moving into cash. But that move may be a mistake. To be sure, if there is a worsening crisis in Europe or we have another severe recession, investors will probably be better off out of the market for a period of time. But unless you feel confident that you can predict these events, its worth considering three reasons to keep some equity exposure.
Making the (Credit) Grade in Emerging Markets
by Russ Koesterich of iShares Blog,
While emerging markets are not without their share of macroeconomic problems, they are not experiencing the same sovereign debt problems as their developed market neighbors. In fact, the worlds sovereign debt problems are centered in developed markets such as Europe, the United States and Japan. Ive already mentioned this as a fact supporting emerging market equities. Its even more supportive of emerging market fixed income.
The US Recoverys Catch-22
by Russ Koesterich of iShares Blog,
With the consumer sector unlikely to fuel a US recovery, that leaves the corporate sector as the engine of growth. At first glance, this would seem to be a safe bet. As I mentioned in early September,the silver lining of todays slow growth environmentcontinues to be the strong financial position of many US companies. But heres the catch: The domestic corporate sector relies on the US consumer. To continue growing over the next few years, companies need consumer spending to pick up. This leads us to the great economic Catch-22 of our time, So, where does that leave the US recovery?
Despite Skeptics, Can Gold Continue to Glimmer?
by Russ Koesterich of iShares Blog,
In recent weeks, a number of market watchers and media headlines have declared that the gold bubble is finally bursting and the gold rally is over. I disagree. First, Ive never believed that gold was in a bubble. Second, I believe that prices for the precious metal are likely to remain high for the foreseeable future. As I pointed out in a recent post, Why Gold Prices Are So High, there are three long-term factors supporting gold. 1) The negative real interest rate. 2) Gold tends to do best when fiat currencies depreciate. And 3) Uncertainty over the endgame of the US deficit.
Transfer Payments and the Risk of a Double Dip
by Russ Koesterich of iShares Blog,
In August, US personal income fell for the first time in nearly two years. One reason for the drop: A slowdown in transfer payments. Transfer payments are government payments to individuals and include everything from Social Security to unemployment benefits. This chart a stark illustration of just how dependent disposal income has become on such payments. Thanks to generous growth in transfer payments in the past 50 years, the payments now account for 20% of disposable income. But transfer payments have been slowing in recent months as fiscal stimulus from the federal government wanes.
Jobless Claims, Leading Indicators Could Show US Economy is Not Contracting
by Russ Koesterich of iShares Blog,
Of all the economic reports coming out this week, Im most closely watching for the latest US weekly jobless claim numbers and the new leading indicators data, due out Thursday. Both will give further confirmation on the near-term state of the economy. As Ive mentioned before, I expect that the US economy is most likely going to experience an anemic expansion, rather than another recession. Recent economic reports have so far confirmed my view. I believe the new data this week will similarly show that the while the US economic recovery has stalled, the economy is not contracting.
Latest Data Points to Anemic Expansion, Not a Recession
by Russ Koesterich of iShares Blog,
Some market watchers are interpreting the fact that US consumer confidence remained extremely low last week as a sign that the chances of a sustained recovery have diminished. In my opinion, however, theyre focusing on the wrong numbers among the slew of economic data released Thursday. The right numbers to focus on: new figures from the Federal Reserve that confirm that while economic activity is stalling, we are not yet seeing credible evidence of a double dip.
Whats Missing From Obamas Plan
by Russ Koesterich of iShares Blog,
In a speech last Thursday evening, President Obama outlined his American Jobs Act, a $447 billion package of tax cuts and government spending he hopes will help stimulate the slowing economy. It calls for reduced payroll taxes, extended unemployment benefits and increased spending on infrastructure to help put people back to work. Without passage, I believe the US will suffer significant fiscal drag in 2012 and the economy will face more headwinds. However, while the proposal could spur some growth, it does nothing to fix the longer-term fiscal problems facing the country.
Brazil and Chile | One for Now, One to Watch
by Russ Koesterich of iShares Blog,
Earlier this month, as part of my changed view of emerging markets. I initiated an overweight view of Brazil and noted that I am paying close attention to Chile. As promised, here are more of my thoughts regarding these two emerging market countries.There are a number of reasons why I like Brazil. First, from a valuation standpoint, Brazil looks attractive relative to both its own history and to other MSCI ACWI countries. I am not yet establishing an overweight view of countries in Latin America beyond Brazil, but I am watching Chile closely.
The Transfer Payment Paradox
by Russ Koesterich of iShares Blog,
You dont have to be a fan of profligate government spending to recognize the enormous paradox the United States faces in getting its economic and fiscal houses in order. The US economy is driven largely by consumptionroughly 70% of GDP comes from personal consumption. A large and growing percentage of that consumption is dependent on federal transfer paymentsdirect government payments to individuals. Yet as the US tries to get its deficit under control, these payments could be cut. That in turn could have a significant impact on disposable income and economic growth.
A headwind blows: Septembers seasonal stock weakness
by Russ Koesterich of iShares Blog,
In recent days, a number of market watchers have issued warnings about economic data and events that could roil markets this September. Investors might also want to consider an additional headwind: The seasonal pattern of equity market weakness in September. While most easy-to-find seasonal patterns fall apart when subjected to a bit of scrutiny, this seasonal pattern does appear to be both statistically significant and fundamentally justified. Most academics attribute the September weakness trend to a combination of tax-loss selling and window dressing ahead of the fiscal-year end.
Slow growths silver lining: Corporate Profit Margins
by Russ Koesterich of iShares Blog,
Despite economic weakness, one sector of the economy continues to perform well: Corporations. Today, corporate profit margins are near record highs. But as concerns of a double-dip recession persist, many market watchers are wondering how much longer high profit margins can last. Answers to this question often focus solely on expectations for rising input prices. But I agree with the major conclusion of a new BlackRock Investment Institute paper-profit margin sustainability is more related to overall economic activity than it is to input costs alone.
Ahead of the Numbers: ISM to give an early read on fallout from market volatility
by Russ Koesterich of iShares Blog,
Of all the economic numbers coming out this week theISM is the most important, in my opinion. First, its a good leading indicator of economic activity in general. The reports new order component, in particular, tends to be highly correlated with the next quarters GDP and is the most relevant number for predicting future economic growth. Second, the report is not subject to revisions, meaning what you see in the initial report is what you get. Finally, the report is extremely timely. Its one of the first snapshots well get on how the economy reacted to market volatility in August.
Brazil and Chile | One for Now, One to Watch
by Russ Koesterich of iShares Blog,
Brazil looks attractive relative to both its own history and to other MSCI ACWI countries. The MSCI Brazil index is currently trading at 1.4x book value, versus its average of 2.1x book value over the past five years. In addition, from September 2008 to July 2009, the OECD composite leading indicator for Brazil was lower than it is today; yet the Brazilian market appears cheaper today than it did during that period on average. While Chile is starting to look interesting and we currently hold a neutral view of it, there is no need to rush in.
Double Dip? Not so quick.
by Russ Koesterich of iShares Blog,
In recent days, market watchers from Bill Gross to Morgan Stanley have warned of the high possibility of a double dip recession for reasons ranging from more regulation and policy errors, to slowing consumption, weak economic data and the likelihood of further fiscal tightening. While I do believe that the odds of a double dip have risen since the S&P downgrade of US debt, I still think the most likely outcome is a sluggish recovery, not another recession. Whats my evidence? Leading indicators and retail sales data in the US and abroad.
Where the Debt Crisis Could Spread
by Russ Koesterich of iShares Blog,
Investors are facing an unprecedented situation. Virtually all the major advanced economies the US, Japan and Europe have simultaneously undergone a significant fiscal deterioration, thanks to the after-effects of the financial crisis and worsening demographics. In addition, investors are wrestling with the implications of the recent US downgrade by S&P, as well as a slowing economy. Markets are rattled and many are wondering: what is the new riskless asset? A new index called the BlackRock Sovereign Risk Index provides just such a framework.
Emerging Markets: The New Defensives?
by Russ Koesterich of iShares Blog,
Traditionally, investors looking for more defensive country-specific exposure would have opted for equities of developed world countries, while the stocks of emerging market countries would have been considered more risky options. However, lately many emerging market countries have actually become more attractive places to invest than parts of the developed world. Why are some emerging markets now more attractive? One reason is that certain countries within the developed world are at the epicenter of the recent global sovereign debt crisis.
Equities, Mega Caps, Germany & More
by Russ Koesterich of iShares Blog,
Given last weeks extraordinary volatility, my call this week focuses on the overall market today. Essentially, I still believe the odds favor slow but positive growth; equities look inexpensive; and volatility appears too high. While I would continue to expect subpar growth, leading indicators arent suggesting that were heading back into a recession. For instance, in the year leading up to the 2008 recession, leading economic indicators fell or were flat in 11 out of 12 months. In contrast, leading indicators have risen in 11 out of 12 months, including the most recent.
Too Much Volatility
by Russ Koesterich of iShares Blog,
While I think that market volatility will be higher in the second half of the year, the current level looks too high to me. In fact, I think that the panic is overdone unless you believe were headed back into another banking crisis or severe recession, both of which I would argue are unlikely. Back in May, when the VIX Index otherwise known as the fear gauge was trading at around 17.50, I highlighted that it looked too low. Now, according to my latest analysis, volatility levels in the 40-plus range are way out of line compared to where leading indicators suggest they should be.
What the Downgrade Means for Investors
by Russ Koesterich of iShares Blog,
The downgrade simply reaffirms what everyone already knew. The US fiscal situation has deteriorated rapidly since 2008. More troubling, it also reiterates that the current structure of the large US entitlement programs and the narrow nature of the US tax base mean that after a brief respite, deficits will likely get much worse in the latter part of the decade. While last weeks bi-partisan deal to raise the debt ceiling alleviated the near-term pressure, the deal explicitly did not address entitlement programs and taxes, the longer-term more troubling challenges for the US fiscal situation.
Are We Heading Back to Recession?
by Russ Koesterich of iShares Blog,
With the inventory build no longer driving the economy, growth is now reflecting real end-user demand. Unfortunately there isnt much of it. Personal consumption is by far the largest component of the economy, accounting for roughly 70% of economic activity. As everyone is well aware, the consumer has been on strike for much of the past three years. Consumers can spend from income, accumulated wealth or borrowing. For much of the previous decade, consumers were able to compensate for the lack of real income gains. Unfortunately, those factors cannot be relied on today.
What the Debt Deal Means for Investors
by Russ Koesterich of iShares Blog,
While the deal is a step in the right direction, there are still some potential risks for the market related to it. First, theres the chance that the deal did not go far enough and could ultimately help lead to an eventual downgrade of US debt. Though credit agencies Fitch and Moodys both confirmed the federal governments AAA rating Tuesday. Theres also the risk that the cuts in the deal are too frontloaded to one or two years from now and will dampen an already fragile recovery. In fact, on Monday and Tuesday, US stocks traded lower despite news of the debt deal.
Russ K.s Market Calls | Developed & Emerging Markets
by Russ Koesterich of iShares Blog,
I started the year with a bias for developed market equities over emerging market equities. Year-to-date, developed equity markets have outperformed emerging markets by roughly 4%. I had two main reasons for favoring developed market equities. Emerging market equities looked expensive relative to their developed market counterparts and I felt that emerging market inflation would be a more persistent problem than the market was discounting. Now, however, these major rationales for broadly favoring developed markets no longer hold.
The Chances of a US Debt Downgrade
by Russ Koesterich of iShares Blog,
I continue to hold a negative long-term view of US Treasuries. That said, given the anemic state of the economic recovery and the growing risk aversion in market places, Treasuries may not necessarily sell-off in the near-term after a US debt downgrade. My view on Treasuries has a longer-horizon and is based on low real yields and a deteriorating fiscal picture. Finally, even if US debt is ultimately not downgraded in the coming weeks, investors need to realize that the US fiscal situation is an ongoing chronic problem that is unlikely to be fully addressed in the near term.
The European Rescue Plan & Italy
by Russ Koesterich of iShares Blog,
At an emergency meeting Thursday, European leaders backed a rescue plan for Greece that was generally in line with what the market had been led to expect. Ultimately, I believe the news supports the case for risky assets such as equities and hurts the case for more risk-averse investments such as the US dollar and US Treasuries. I think that the risks facing the Italian market are more than adequately reflected in the valuations, as the country currently trades at just 9 times forward earnings and 0.8 times book value, one of the lowest valuations among developed countries.
More on the Case for Mega Caps
by Russ Koesterich of iShares Blog,
While the recent June non-farm payroll report offered yet another reminder of the fragile and sluggish nature of the current recovery, we continue to believe that equities offer better prospects than fixed income. A combination of high margins, low inflation and some top-line growth will continue to support stocks. For the most part, the largest companies are cheaper, more profitable and more diversified than their smaller counterparts. In fact, US and global mega-cap companies remain one of the few unambiguously cheap asset classes, trading at roughly a 15% discount to the broader market.
The Debt Ceiling Debate & China
by Russ Koesterich of iShares Blog,
This week, our first call focuses on the ongoing drama over the US debt ceiling and its implications for the US Treasury Market. While the clock continues to tick towards an August 2nd deadline for raising the debt ceiling, Congress and the White House are still nowhere near a compromise. Next, heres a quick update regarding our view of China. While we remain, for now, neutral on China, and hold a negative view of emerging markets in general, our stance on China is starting to shift to a more constructive, or positive, view.
Monday Market Calls | US Retailers
by Russ Koesterich of iShares Blog,
The ongoing challenges facing the consumer ? a weak labor market, anemic wage growth, too much debt and a stagnant housing market ? have been well documented. To our thinking, these issues are not likely to be resolved in the near-term. Yet despite the long litany of problems, investors continue to favor US retailers. We believe this enduring faith in the willingness and ability of the US consumer to spend is misplaced.
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