The themes that have emerged from the company’s research, said Russ Koesterich, BlackRock global chief investment strategies, is that investors must be more tactical, that safe havens are not so safe. Investors have to think about relative value, not just cheap bonds. Many of these opportunities will arise in high-yield and emerging markets.
In a paper called “Forget Rotation: Think Risk Mitigation,” BlackRock lays out a number of ways investors can think tactically for short-term cycles in a world where interest rates are low for an extended period:
- Find hidden risks in bond portfolios, which means moving away from benchmarks.
- Go short—shorten bond duration and look at higher yielding credit rather than “safe” government bonds.
- Rotate duration, since markets overshoot.
- Think less about capital gains and focus on the income component in sectors such as municipal bonds.
- Look for “quality bargains.” “The hunt for yield has boosted no-so-great income assets,” says the paper. “Climb up the quality ladder for a small loss in yield.”
- Options to protect against downside risk are cheap, so investors should consider those as insurance.
- Look for bond pickers, since correlations between classes are collapsing.
- Consider shorting bad plays as well as stocking up on good ones.