iShares Spring 2023 Investment Directions

As one of the most rapid policy rate tightening campaigns in recent memory likely approaches its conclusion, signs of distress have become evident in weak and poorly run areas of the global financial sector. While we strongly believe there is enough systemic liquidity in the U.S. and European banking systems, and that banks are adequately funded and capitalized, in markets fear can trump fact. A crisis of confidence can become a self-fulfilling prophecy if it spreads widely enough and persists for long enough.

Policymakers will closely monitor incoming data to determine just how much the banking shock will adversely impact financial conditions via tighter lending standards, wider credit spreads and greater caution in hiring, consumption, and capital expenditures. Fed Chair Powell made it clear that he views the resulting tighter credit conditions as equivalent to additional policy tightening, meaning the bar for further rate hikes has been raised.

For investors, we believe it is less important to quantify the precise impact of the shock on financial conditions than it is to understand the broad implications. While the Fed’s Survey of Economic Projections showed little change in the committee’s average expectation for the path of policy rates, they showed a material deterioration in GDP growth, down to 0.4% in 2023.1 Combined with the Atlanta Fed’s GDPNow forecast of 3.2% for the first quarter of 2023, this implies a sharp slowdown for the remainder of this year.2

Slower growth and tighter financial conditions could mean a lower terminal rate and bring forward the timing of the first rate cut. While we still expect rates to be higher for longer on persistent inflation, we believe rates will probably be slightly ‘less high’ for slightly ‘less long’ than previously thought. That belief shapes our outlook for Q2 2023.

  1. Our highest conviction allocation remains fixed income. We still see tremendous value in short-dated Treasuries for income, but also see benefit in opportunistically adding to duration for ballast in the potential coming recession. Persistent inflation and falling real rates could benefit Treasury Inflation-Protected Securities (TIPS), and local currency emerging market (EM) debt also looks attractive.
  2. In U.S. equities we end our preference for value and instead shift to exposures with quality characteristics to lead in a slowing economy. We also introduce a framework for identifying growth at a reasonable price, a screen that favors global tech and global energy.
  3. Our tactical overweight to EM equities is fueled by China’s reopening, a weaker dollar, and the potential for looser monetary policy in the region, though in the long run we see demographic challenges to growth and geopolitical tensions as a headwind.
  4. Both volatility and correlations in traditional asset classes have risen. Commodities can be instrumental in choppy markets characterized by high volatility and low visibility. We see tactical opportunities to help hedge portfolios using gold.

With high quality fixed income like highly rated Investment Grade credit and Treasuries yielding the same today that “junk bonds,” or poorly rated bonds, did just a year ago, we see a generational opportunity to allocate to fixed income.3 While short duration still offers attractive yields, we also believe investors may want to consider taking advantage of any back up in rates to start moving back into intermediate duration fixed income, which can provide ballast in the coming recession.


The Fed may yet deliver more rate hikes, but their dovish tone in March reinforces our view on owning the front end of fixed income markets. We still see an opportunity in short and ultra-short duration exposures given the inversion of the yield curve. And, while front end yields have declined in recent weeks, they are still near multi-decade highs and may remain here as investors brace for recession. We believe the recent drop in two-year and other short-term U.S. government bond yields may reverse when it becomes clear central banks will not aggressively ease in 2023. However, we view any meaningful reversal in front end yields as an opportunity to add to fixed income allocations. 


We believe investors could use any moves higher to begin stepping into the broader U.S. bond market, with yields on the 10-year U.S. Treasury bond above 3.7% seen as buying opportunities to own duration in the higher quality parts of the Treasury and investment grade credit markets. The Bloomberg US Aggregate Index (“the Agg”) provides investors with exposure to multiple high-quality U.S.-denominated fixed rate sectors such as U.S. Treasuries, investment grade corporates, and U.S.-agency-backed mortgages. The current Yield to Maturity on the Agg provides a greater yield cushion than in the past: because more of the expected total returns are attributed to coupon income, exposure to the Agg could generate positive returns even if yields move modestly higher.

Figure 1: Yield to Maturity on the Bloomberg U.S. Aggregate Index near highest since 2008

Line chart displaying yield to maturity. The line shows a spike in 2008, and then gradually decreases.

Source: BlackRock, Bloomberg, chart by iShares Investment Strategy. As of March 01, 2023.


Index performance is for illustrative purposes only. Index performance does 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.

Chart description: Line chart displaying yield to maturity. The line shows a spike in 2008, and then gradually decreases. However, the line slopes positively starting in 2020, reaching a peak in 2022.


The need for inflation protection is especially salient in a scenario where inflation remains firm, but the Fed backs off from an aggressive rate hiking cycle. This is consistent with the market anticipating real rates continuing to fall in the months ahead, which could benefit inflation linked bonds.4

Current valuations for TIPS also look attractive, especially since we believe that structural forces such as the transition to net zero, a re-wiring of global supply chains, and aging demographics can all contribute to inflation remaining well above the pre-pandemic levels in the medium term.


We also favor owning local currency emerging market debt, particularly if the path of the USD stabilizes from the straight line higher we saw in 2022. If there is a growth slowdown in the months to come, as we expect, emerging markets could be in a better position to cut interest rates than their developed markets (DM) counterparts, as inflation has remained more contained in many EM markets.

Figure 2: Percent of fixed income markets yielding over 4%

Line chart depicting the percentage of the fixed income market yielding over 4% in a given year, dating from 1999 to 2022, including U.S.

Source: Bloomberg and Thomson Reuters, 12/31/2022. The bars show market capitalization weights of assets with an average annual yield over 4% in a select universe that represents about 70% of the Bloomberg Multiverse Bond Index. U.S. treasury represented by the Bloomberg U.S. Treasury index. Euro core is based on the Bloomberg French and German government debt indexes. U.S. agencies represented by Bloomberg U.S. Aggregate Agencies index. U.S. municipal represented by Bloomberg Municipal Bond index. Euro periphery is an average of the Bloomberg Government Debt indexes for Italy, Spain and Ireland. U.S. MBS represented by the Bloomberg U.S. Mortgage Backed Securities index. Global credit represented by the Bloomberg Global Aggregate Corporate index. U.S. CMBS represented by the Bloomberg Investment Grade CMBS index. Emerging market combines the Bloomberg EM hard and local currency debt indexes. Global high yield represented by the Bloomberg Global High Yield index.


Past performance is no guarantee of future results.  Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

Chart description: Line chart depicting the percentage of the fixed income market yielding over 4% in a given year, dating from 1999 to 2022, including U.S. Treasury, Euro core, U.S. agencies, and other fixed income allocations. The chart shows muted yields across fixed income exposures over the previous decade, with only EM and global HY allocations yielding over 4%. In 2022, however, yields increased across fixed income allocations.


Over the last 12 months, financial professionals have been under allocated to their fixed income investments and many pension funds have funded rations in excess of 100%.5 This means many types of investors may find fixed income investment opportunities attractive. While short-term U.S. Treasury ETFs still dominate the fixed income flow landscape with $20bn of net inflows year-to-date, investors have gradually added more than $7bn into longer-term U.S. Treasury ETFs as they unwind an underweight to duration that many investors have held since last year.6



For equity investors, slowing growth and still-high interest rates means difficult decisions within a broadly underweight allocation to stocks. Value-style stocks may not perform as well as we earlier anticipated, as this style of equity can struggle when rates start to fall and growth starts to slow. That said, since we do not anticipate the Fed will cut rates aggressively this year, we also don’t like highly speculative growth stocks or non-earning frontier technology.

We think investors pursuing strong relative performance may want to consider companies with quality earnings. This includes companies with high returns on capital, margin stability and solid balance sheets with reasonable valuations. But also - since we believe rates and the U.S. dollar likely came to a cycle peak in Q4 2022 — we favor quality-tilted growth stocks and companies with sales exposure outside the United States.7 In short, we are looking for Growth At Reasonable Prices (GARP), particularly companies with a global exposure.

Applying a strictly quantitative framework that optimizes for both Growth and Quality (see chart below), we observe a distinct preference for established technology and energy companies, both of which boast low use of leverage, and high free cash flow. Our qualitative overlay further prefers global companies over U.S., and established names selling conventional products over companies developing new products in energy or technology.

We believe the current environment argues for quality and defensiveness in equities. Investors can look to the Quality and Minimum Volatility factors to help provide exposure to these attributes across the broad equity market. Investors who prefer a more granular approach can consider tailoring this view via a barbell of global technology and global energy. Those who believe the U.S. economy is headed for a sharp slowdown and rate cuts may prefer a larger allocation towards global technology. For those who believe the U.S. will experience only a shallow downturn or a period of sluggish growth, a heavier allocation towards global energy could potentially be beneficial.

Figure 3: Growth at Reasonable Prices (GARP) means tech and energy

Scatterplot showing Growth at Reasonable Prices (GARP) scores, with growth scores across the X-axis, and quality scores on the Y-axis.

Source: BlackRock, Bloomberg, as of March 28, 2023. Pink markers represent the iShares Investment Strategy's favored segments (Oil & Gas Exploration, Global Energy Producers, Global Energy, Global Tech, US Tech, US Energy, while green markers represent other indexed segments that scored relatively lower on growth and/or quality metrics. Global Energy producers represented by M1WDSEPI Index; Oil & Gas Exploration represented by M1WDSGPI Index; Global Energy represented by SPG12CEN Index; U.S. Energy represented by RIYECTR Index; Global Tech represented by SPG12CTN Index; U.S. Tech represented by RIYWCTR Index.


Note: Growth metrics are based on an equal-weighted ranking of Compounded Annual Growth Rates of operating earnings per share, current price per sales and the PE/G ratio. PE/G ratio is a company's price/earnings ratio divided by its earnings growth rate over the next business cycle, adjusting the traditional P/E ratio to take future growth rate into account. Quality metrics are based on an equal-weighted ranking of trailing free cash flow to price, return on common equity, total assets divided by total equity and earnings variation (the standard deviation of long-term EPS growth estimates).

Chart description: Scatterplot showing Growth at Reasonable Prices (GARP) scores, with growth scores across the X-axis, and quality scores on the Y-axis. The plots show Global Tech and US Tech scoring high on growth scores, while Global Energy Producers, Global Energy, and US Energy ranking high on quality metrics.


Our tactical overweight in Emerging Markets is driven by three near-term catalysts: the economic restart in China, a weaker U.S. dollar, and loosening monetary policies in the region. We do note, however, that challenging demographic dynamics and mounting geopolitical tensions leave us neutral on China over a longer term horizon, causing us to prefer a modular approach to EM investing that allows us to dial up or down tactical China exposures according to current opportunities.

The lifting of Covid restrictions in China last December has led to a meaningful rebound in economic activity. New home completions growth turned positive in January and February rising to 8.0% year over year after contracting -6.6% YoY in December.8 A restart of economic activities doesn’t happen overnight, and domestic consumption — which currently makes up nearly 54% of GDP — may continue to grow.9 More importantly, China’s reopening not only benefits the domestic Chinese economy, but also boosts the broad EM region with a strong pick up in travel and consumption abroad.

Secondly, the dollar’s strength has faded since October last year, falling more than 12% from last year’s two-decade highs.10 Historically, a weak U.S. dollar is associated with strong equity performance for EM assets like equities and local currency debt. While stronger local currencies could benefit investors who are taking risk with foreign currency exposures, a weak dollar can also relieve pressure for emerging markets with high external debt obligations, as most sovereign debts are U.S. dollar denominated. A weaker U.S. dollar also rewards emerging market countries with more purchasing power, making foreign imports and commodities less expensive as a result.

Lastly, inflation in most EM regions remains contained relative to DM, allowing local policy makers to provide accommodative monetary support. For example, China announced a surprise reserve requirement ratio (RRR) cut in March to enhance the ability of banks to lend more money. Estimates show that 500 billion to 600 billion yuan ($72.6 billion to $87.2 billion) of liquidity will be unleashed into the market as a result.11

Figure 4: EM performance & China imports rise after falling the last two years

Line and area chart depicting China imports and MSCI Emerging Market Index performance.

Source: Bloomberg, Refinitiv as of March 24, 2023. EM performance represented by MSCI Emerging Markets Index (MXEF Index).


Index performance is for illustrative purposes only. Index performance does 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.

Chart description: Line and area chart depicting China imports and MSCI Emerging Market Index performance. The line chart shows positive relationship between the two lines - imports and EM performance are positively correlated. The line chart shows imports beginning to pick up in 2023.

Global investors have turned more constructive on emerging market exposures this year. Broad EM ETFs have seen over $13 billion of inflows since the beginning of 2023, with an additional $2 billion of inflows into single country focused ETFs, as investors take advantage of tactical opportunities around the globe.12 Investors have also increasingly taken a modular approach when it comes to adding EM allocations, breaking EM into China and EM ex-China. As we expect U.S.-China tensions to remain persistent, likely attaching an increased geopolitical risk premium to Chinese assets, a dedicated EM ex-China approach allows investors to stay nimble in international investing.


Growth and inflation risks have thrown a blanket of uncertainty over markets. From tighter lending standards to five straight months of contractionary manufacturing PMIs, economic upside feels constrained.13

Figure 5: Volatility elevated across bonds and equities

Line chart displaying equity and rate volatility since 2006, showing spikes in 2022, higher than one standard deviation over the previous decade.

Source: BlackRock, Bloomberg. Equity volatility represented by Chicago Board Options Exchange’s CBOE Volatility Index. Rate Volatility represented by Merrill Lynch Option Volatility Estimate Index. As of March 24, 2023. Standard deviation measures how dispersed returns are around the average. A higher standard deviation indicates that returns are spread out over a larger range of values and thus, more volatile.

Chart description: Line chart displaying equity and rate volatility since 2006, showing spikes in 2022, higher than one standard deviation over the previous decade.

Volatility across equities and bonds has been meaningfully higher this year compared to the past decade on average (see chart above). Amidst the instability, portfolio diversification has reemerged as top of mind for many investors. However, positive correlations between equities and bonds have made it harder to find portfolio ballast. The diversified nature of some commodities has therefore been instrumental in choppy markets characterized by high volatility and low visibility.

March saw the stress in the U.S. banking system force policymakers to intervene, echoing the financial stability measures of 2008. Given the historical context, it’s not surprising investors turned to gold as a relative “safe-haven” during the volatility: gold prices have risen over 9% year-to-date.14 Although the Federal Reserve intervened quickly and forcefully, investors became acutely aware of the risks to the U.S. economy that stemmed from tightening monetary policy. There may be more destabilizing surprises out there.

We believe the presence of ‘fear’ in the market — whether that be of contagion or recession — supports gold prices from here. Although gold is a non-yielding asset, a tactical allocation may make sense for some investors looking to help reduce downside risk ahead of possible subsequent events.


The iShares Gold Trust and iShares Gold Trust Micro are not an investment company registered under the Investment Company Act of 1940, and therefore are not subject to the same regulatory requirements as mutual funds or ETFs registered under the Investment Company Act of 1940. Investments in these ETF's are speculative and involves a high degree of risk. Visit for a prospectus, which includes investment objectives, risks, fees, expenses and other information that you should read and consider carefully before Investing.

Gargi Pal Chaudhuri

Head of iShares Investment Strategy Americas at BlackRock

Kristy Akullian, CFA

Investment Strategist


David Jones

Investment Strategist


Jasmine Fan, CFA

Investment Strategist


Nick Morales

Investment Strategist


Jon Angel

Investment Strategist


Faye Witherall

Investment Strategist


Meghan Colarusso

Partner Team


Viviane de Freitas

Partner Team


Connor Stack

Partner Team