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April 2019

An investor’s guide to Q2 2019

Christopher Dhanraj
Director
Head of iShares Investment Strategy
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Our investor’s guide to Q2 2019 turns insights into investable action with ETFs.

Markets are off to a robust start this year, rebounding from late 2018’s market angst about an imminent slowdown and overly hawkish Federal Reserve. A dovish Fed pivot and a perceived reduction of geopolitical risk have lifted market sentiment. Still, the buoyant mood is tempered by the reality that the path for further gains is narrow and risks remain. The global economy must remain strong enough to quell recession fears but weak enough to keep policymakers on hold.

As we head into the second quarter, investors should consider adjusting their portfolios after a sharp run-up in both stocks and bonds. Key questions to address: What do I need to know about the markets, and what should I do about it?

To answer those questions, we highlight three key themes for the markets in the next quarter, along with ways to implement these views in your portfolio.

1. Slowing global growth

What to know: We see global growth slowing as the long post-crisis expansion nears its final stage. The U.S. is again poised to outpace its developed peers, underscoring our preference for U.S. assets within the developed world. We expect fiscal and monetary stimulus to drive a Chinese growth turnaround during the second quarter, underpinning global growth.

At the same time, we remain confident that the economy can avoid a recession throughout 2019. The economy is slowing, but still growing – and we see little sign of economic overheating or inflationary pressures.

What to consider: The implication of decelerating growth is that long-term investors generally may want to continue to take some risk in their portfolios, with a preference for stocks over bonds. Quality, defined by companies with strong cash flow, growth and balance sheets, remains a key theme amid uncertainty. Two sectors where we are finding it: health care and technology. Our favored regions remain the U.S. and emerging markets.

2. Policymakers showing patience

What to know: Central banks around the globe have become much more dovish, and interest rates have dropped. The Fed has pledged to be very patient in evaluating its next rate move. Other monetary authorities, including the European Central Bank, are indicating policy will remain easy for some time. And China is loosening credit conditions and fiscal policy.

What to consider: Patient policymakers support both stocks and bonds, but the risk is that the first quarter’s outsized market moves mean that assets may have already priced in the good news. Still, this backdrop supports our preference for emerging market assets. We expect a gradual steepening of the yield curve, driven by still-solid U.S. growth, a Fed willing to tolerate inflation overshoots — and a potential shift in the Fed’s balance sheet toward shorter-term maturities. This supports two-to-five-year maturities and inflation-protected securities.

3. Balancing risk and reward

What to know: As we head into the second quarter, striking a balance of taking the appropriate risks to achieve one’s goals – always the foundation of sound investing – is more important than ever. The overall positive environment suggests sticking with risky assets, but being selective, as signs of a more pronounced growth slowdown or new trade disputes could create uncertainty. We favor quality assets in portfolios that can offer resilience if things get bumpy, balanced with those that offer upside.

What to consider: We favor blending low- and high-risk exposures, such as owning U.S. government debt as a potential portfolio diversifier, along with other fixed income assets that may offer attractive yields, including municipal bonds. These would go alongside allocations to assets that offer a higher risk/return prospect. We favor emerging market equities and see the greatest opportunities in emerging market Asia.