BlackRock’s Koesterich Says U.S. Political Risk Underpricedby
Sees value in health care, technology, emerging markets
Says high cash levels are necessary as bonds less of a hedge
Russ Koesterich, head of asset allocation for the Global Allocation Fund at BlackRock Inc., the world’s largest asset manager, expects political risk in developed markets to linger no matter who wins the U.S. presidential election in November. Koesterich, whose fund holds $43 billion in assets, said he sees value in technology and health care stocks, and is avoiding consumer staples.
Koesterich spoke Oct. 21 with Bloomberg Brief’s James Crombie about the impact of the U.S. elections on markets, the outlook for interest rates and sectors where he sees value.
Q: What’s your U.S. election outlook?
A: Looking at the polls today suggests that Hillary Clinton is likely to win, Republicans are likely to maintain a narrow majority in the House that will be close to evenly divided. Polls may be misleading but we’ve had a much more consistent level of polling going into the U.S. election than we had going into the Brexit vote.
Q: What’s the longer-term impact of this election?
A: Political risk does linger. It may actually even worsen because what this election has made very clear is we have a very divided country. The rise of populist sentiment, of nationalist sentiment, of anti-trade sentiment is evident not just in the U.S. but in most parts of the world. I think that is an ongoing risk and it probably is one that is underpriced. One of the reasons we are underweight the U.S. is that it’s hard to justify a premium valuation in an environment in which political risk is going to be heightened. I also think it suggests that market volatility is too low. We are seemingly in a period in which political risk in many developed countries is at least as acute as it is in some emerging market countries.
Q: How will rates be impacted?
A: If you have a Clinton presidency, I think you’re likely to see a continuation of current policy at the Fed. The Fed will, probably as early as December, continue their tightening campaign. If you have continuity at the Fed, then I think the dollar probably appreciates, though not nearly as quickly as it did back in 2014.
Q: Where are the best market opportunities?
A: Right now there is relative value in technology. We see some value in health care. Hospitals would theoretically stand to benefit if there is a continuation of the ACA (Affordable Care Act), which is our base case. We still think there are opportunities in corporate credit. Right now we are overweight both in our investment grade and high-yield positions in the U.S.
Q: Why technology?
A: Tech is one of our largest overweights because we’re finding business models within technology that are managing to grow their franchise even without a lot of economic growth.
Q: What do you avoid?
A: We’re underweight fixed income, particularly international sovereigns such as bunds and JGBs (Japanese government bonds).
Q: What about equities?
A: We’re underweight other bond market proxies besides utilities. The one we’re most underweight are consumer staples companies. We just think that these names have been bid up way too high as people have fled the bond market in search of safe yield. If the next source of volatility in the market is a growth shock, then staples are probably a reasonable place to hide. However, if you have a situation like what we’ve seen recently — where the source of volatility is not concern about growth but concern about rates and the Fed — then these may be a very poor place to hide because they tend to behave like bonds when rates go up.
Q: What about emerging markets?
A: Relative to other opportunities in the fixed income space, EM debt still looks reasonable and this has been one place that we’ve been marginally adding to the portfolio. We have been seeing on the equity side good value in Asia. On the fixed income side, we’ve been seeing some good value in Eastern Europe.
Q: Are you holding a lot of cash?
A: We’re about 10 percent cash. That is higher than it was 3-4 months ago but lower than it was last August. High cash levels aren’t because people are overly bearish, they are just becoming the necessary hedge in a world in which bonds are less likely to fulfill that role.