Mr. Koesterich is the chief investment strategist for BlackRock and iShares chief global strategist.
The briefing room was packed. Perhaps Several hundred people. Many standing along wall. The reception afterward was just madness.
His briefing was entitled "2014 Mid-Year Update - What to Know / What to Do."
He threaded a somewhat cautiously reassuring middle ground. Things aren't great. But, they aren't terrible either. They are just different.
Different, perhaps, because the fed experiment is untested. No one really knows how QE will turn out. But in mean time, it's keeping things together.
Different, perhaps, because this is first time in 30-some years where investors are facing a rising interest rate environment. Not expected to be rapid. But rather certain. So bonds no longer seem as safe and certainly not as high yield as in recent decades.
To get to the punch-line, his advice is:
1) rethink bonds - seek adaptive strategies, look to EM, switch to terms less interest rate sensitive, like HY, avoiding 2-5 year maturities, look into muni's on taxable accounts
2) generate income, but don't overreach - look for flexible approaches, proxies to HY, like dividend equities
3) seek growth, but manage volatility - diversify to unconstrained strategies
More generally, he thinks:
We are in a cyclical upswing, but slower than normal. Does not expect US to achieve 3.5% annual GDP growth (post WWII normal) for next decade.
Reasons: high debt, aging demographics, and wage stagnation (similar to Rob Arnott's 3D cautions).
He cited stats that non-financial debt has actually increased 20-30%, not decreased, since financial crisis.
US population growth last year was zero.
Overall wages, adjusted for inflation, same as late '90s. But for men, same as mid 70s. (The latter wage impact has been masked by more credit availability, more women working, and lower savings.)
All indicative of slower growth in US for foreseeable future, despite increases in productivity.
Lack of volatility is due to fed, keeping interest rates low, and high liquidity. Expects volatility to increase next year as rates start to rise.
He believes that lower interest rates so far is one of year's biggest surprises. Explains it due to pension funds shifting out of equities and into bonds and that US 10 year is pretty good relative to Japan and Europe.
On inflation, he believes tech and aging demographics tend to keep inflation in check.
BlackRock continues to like large cap over small cap. Latter will be more sensitive to interest rate increases.
Anything cheap? Stocks remain cheaper than bonds, because of extensive fed purchases during QE. Nothing cheap on absolute basis, only on relative basis. "All asset classes above long term averages, except a couple niche areas."
"Should we all move to cash?" Mr. Koesterich answers no. Just moderate our expectations going forward. Equities are perhaps 10-15% above long term averages. But not expensive compared to prices before previous drops.
One reason is company margins remain high. For couple of same reasons: low credit interest and low wages. Plus higher productivity.
Advises we be selective in equities. Look for value. Like large over small. More cyclical companies. He likes tech, energy, manufacturing, financials going forward.
This past year, folks have driven up valuations of "safe" equities like utilities, staples, REITS. But those investments tend to work well in recessions...not so much in rising interest rate environment.
EM relatively inexpensive, but fears they are cheap for reason. Lots of divided arguments here at BlackRock.
Japan likely good trade for next couple years due to Japanese pension funds shifting to organic assets.
He closed by stating that only New Zealand is offering a 10 year sovereign return above 4%. Which means, bond holders must take on higher risk. He suggests three places to look: HY, EM, muni's.
Again, a moderate presentation and perhaps not much new here. While I personally remain more cautiously optimistic about US economy, compared to mounting predictions of another big pull-back, it was a welcomed perspective.
Comments
Regards,
Ted
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