Many investors have flocked to emerging market (EM) and European equities this year, as money has broadly flowed back into risk assets. Our analysis suggests these equity trades are becoming consensus, but we believe they still have room to run. This week’s chart helps explain.


EM and European stocks look more popular than last year, based on an analysis of flows, price momentum, and positioning by Blackrock’s Risk and Quantitative Analysis team. Yet these asset classes do not appear excessively crowded (a score above 2). In contrast, positioning in U.S. credit looks more stretched.

A preference for equities over credit

We view crowding as a sign of heightened risk rather than a signal to sell. There have been significant flows into exchange-traded products and mutual funds across asset classes this year, as perceived economic and political risks have declined and many investors have put cash to work in response. Nearly $ 170 billion has flowed into global bond funds year-to-date, and $ 140 billion into global equity funds, EPFR Global data show. At the same time, money market funds have experienced notable outflows.

EM and European stocks are no longer the contrarian trades that they were for much of 2016, but we believe there’s still a strong case for exposure to international stocks. Our “risk ratio” gauge of risk appetite is at levels consistent with moderate risk taking, but nowhere near the “irrational exuberance” seen in the late-1990s or mid-2000s. Strong inflows year-to-date have only replaced a quarter of the outflows from EM stocks between the 2013 Taper Tantrum selloff and mid-2016, and only 17% of the flows out of European equities last year.

Global reflation, a strong earnings recovery and attractive equity risk premiums also should support international stocks. Against this backdrop, we prefer taking risk in equities over credit, where positioning is more crowded and valuations less attractive, though we do see opportunities in high-quality U.S. credit. Read more market insights in my Weekly Commentary.

Richard Turnill is BlackRock’s global chief investment strategist. He is a regular contributor to The Blog.

Investing involves risks, including possible loss of principal. Investing involves risks, including possible loss of principal. International investing involves special risks including, but not limited to currency fluctuations, illiquidity and volatility. These risks may be heightened for investments in emerging markets.  This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of June 2017 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader. ©2017 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States or elsewhere. All other marks are the property of their respective owners. RO-169472
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