3 reasons to stick with tech stocks

Technology shares are once again leaving everything else in the dust. Year-to-date, the MSCI Information Technology sector, led by U.S. tech, is beating the broader market by over 5% and is ahead of laggards, notably energy, by nearly 20% (see Chart 1).

Given the magnitude of the gains, many are understandably wondering if it’s time to sell. My simple answer: no.

I last wrote about technology and growth stocks in September. At the time I suggested that growth should continue to outperform.  Today, while the broader style and tech sector are vulnerable near-term, I would cite three reasons why outperformance should continue.

1. It’s all about the cash flow.

Based on traditional metrics, technology shares look expensive. The S&P 500 Technology Sector trades at approximately 23 times this year’s earnings (P/E). Looking at relative value – the P/E of the sector versus the broader market – the sector is trading at roughly a 22% premium, a level we have not seen in more than a decade. That said, the sector remains extraordinary profitable.  The return-on-equity is roughly 30%, seven percentage points above the 10-year average. Exceptional profitability has led to exceptional cash-flow generation, much of which is returned to shareholders in the form of buybacks. As a result, using price-to-cash flow (P/C), tech’s premium looks right in-line with the 10-year average.

2. Easy financial conditions help.

Another factor favoring technology is liquidity. Technology stocks are much more likely to outperform when liquidity is improving. Using the Goldman Sachs Financial Conditions Index as a proxy, rising liquidity has been associated with average monthly outperformance of about 1.5%. Conversely, the sector underperformed by an average of nearly 1% in months when financial conditions deteriorated. Perversely, the current environment of soft growth and hard-to-quantify growth shocks, i.e. the coronavirus, supports liquidity and by extension tech shares.

3. In a slow growth world, tech can be defensive.

Finally, and most surprisingly, tech is not the same “high beta” play it was in the 1990s. Between 1995 and the end of the financial crisis, tech typically underperformed by roughly 0.10% for every 1% rise in market volatility, measured by the VIX Index. That pattern no longer holds. Today, when rising volatility is met with a policy response, as it tends to be, technology is more likely to outperform. Since 2010, in months when volatility rose and financial conditions eased, the median relative return for technology was + 0.38%. This change in fortune is arguably a function of big, long-term trends. Regardless of the quarter-to-quarter shifts in the economy, investors have confidence that secular themes –cloud computing, AI or internet retail – support tech earnings.

None of the above means that technology is not vulnerable to a short-term correction. That said, looking out over the next year technology stocks are still likely to have the wind at their back, even if things get a bit rougher.

Russ Koesterich, CFA, is a Portfolio Manager for BlackRock’s Global Allocation Fund and is a regular contributor to The Blog.

Investing involves risks, including possible loss of principal.

Funds that concentrate investments in specific industries, sectors, markets or asset classes may under-perform or be more volatile than other industries, sectors, markets or asset classes and than the general securities market.

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 February 2020 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. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

2020 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

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Coronavirus testing our global outlook

We still expect the global growth to edge higher this year, even as the coronavirus outbreak has introduced uncertainties, as detailed in the February update of our Global Outlook. V-shaped recoveries in economic activities have often followed past epidemics – and we expect a repeat of this pattern. Yet the depth and width of the “V” this time are highly uncertain. This outbreak could be more disruptive than past ones because it could be more severe, and because of greater reliance on global supply chains.

Growth prospects have started to improve in key developed economies since late 2019. Our BlackRock Growth GPS, which aims to give a read of where consensus forecasts of real economic growth may stand in three months’ time, has shown an inflection in growth expectations for the U.S., the euro area, Japan and the UK. See the chart above. Growth momentum was also starting to recover in emerging markets (EM) late last year. The coronavirus outbreak has emerged as a principal risk to our global growth outlook. Historically the post-outbreak recoveries have often been fueled by the pent-up demand in retail and a restart of manufacturing sector. Yet key uncertainties around this outbreak may make history an unreliable guide. It is still too soon to gauge the magnitude and duration of this outbreak as well as its overall impact on the global economy.

icon-pointer.svgRead more market insights in our Weekly commentary.

The short-term impact from the coronavirus outbreak – thus far mostly stemming from China’s containment measures – will likely play out in coming quarters. Based on what we now know, we see it delaying, but not derailing, a growth uptick that should take root this year. China’s central bank has already started to ease policy, and we are likely to see more support from Chinese authorities to shore up growth, yet an ongoing desire to rein in financial excesses leaves open the size and shape of the stimulus. Another key development to watch: How extensively will the outbreak spread beyond China?

The coronavirus outbreak may also pose medium-term risks. Potential disruptions to global value chains could drive up prices – and push companies that suffer from such disruptions to build up higher stockpiles and start to rethink prevalent just-in-time inventory management systems. This adds to the potential disruptions to global supply chains from trade protectionism. Over time, such supply shocks could lead to a change in the macro regime. One possibility: Growth slows and inflation rises. This might pressure the negative correlation between stock and bond returns over time, reducing the diversification properties of government bonds.

Bottom Line

Our base case for the global economy in 2020 is still for a modest pickup in growth, with a slight rise in U.S. inflation pressures. This in turn limits recession risks. Financial vulnerabilities are climbing, but our overall gauge of vulnerabilities across the economy stands well short of its peaks ahead of the last recession. We still view this as a favorable backdrop for risk assets over a 6-12 months horizon, even considering the impact from the coronavirus outbreak.  Yet many uncertainties around its severity, as well as potential economic and market impacts could make the path forward uneven. Over the same time horizon, we still see potential for a bounce in cyclical assets, such as Japanese and EM equities, as well as EM debt and high yield. We see a neutral stance on U.S. equities as appropriate as growth recovers and uncertainties around the 2020 U.S. election intensify – despite their recent outperformance. We are underweight European equities and see greater upside in cyclical exposures elsewhere. We prefer short-term U.S. Treasuries on a tactical basis and like both long-term Treasuries and Treasury Inflation-Protected Securities (TIPS) as sources of resilience against potential regime shifts in strategic allocations, even as the recent rally in real rates has made an entry point less attractive now.

Mike Pyle, CFA, is Global Chief Investment Strategist for BlackRock, leading the Investment Strategy function within the BlackRock Investment Institute. He is a regular contributor to The Blog.

Investing involves risks, including possible loss of principal.

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 February 2020 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and non-proprietary 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. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

©2020 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

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How disruption is changing the growth vs. value debate

Full disclosure: I’m a long-time value investor. It’s a discipline I’ve always found to be rewarding even if it hasn’t always been easy. Recent history illuminates the struggle: The Russell 1000 Value Index has lagged its growth counterpart by roughly 4% annually over the 10 years ended Jan. 30, 2020.

The long-term win, however, still goes to value. Over the past 50 years, large-cap value stocks have returned 13.5% annually versus 10.2% for large-cap growth stocks, according to data from professor Kenneth French.

With a relatively strong macroeconomic backdrop and unprecedented disruption across industries, it would be reasonable to infer that the ongoing growth advantage could continue in 2020 and beyond. Successful disruptors are fruitful growers ― and the degree of disruption is only increasing. As shown in the chart below, variations of the word “disrupt” appeared in broker reports for 72% of companies we reviewed at the end of 2019, up from 39% at the start of 2002.

While we expect these trends to continue, we believe focusing exclusively on growth would mean missing out on significant opportunity on the value side of the ledger. We see great potential in both investing styles.

Going for the growth

Massive disruption, whether driven by technology, demographics or otherwise, is testing (sometimes displacing) traditional business models.

The rise of new and disruptive businesses has been a tailwind for growth investors, propelling the Russell 1000 Growth Index 16% annually over the past 10 years. Some worry that valuations are overextended, but we see few red flags. While many of these companies may appear expensive, their ability to compound earnings at an above-market rate suggests they could become relatively more attractive in 12-18 months.

Additionally, valuations for the broad group are not as high as they were at the peak of the dot.com bubble, and on a cash flow basis are not universally stretched. Interest rates are also far lower today, making stock valuations attractive relative to bonds. And importantly, most growth businesses today are exhibiting strong free cash flow, giving them the operational flexibility to absorb shocks.

My colleague and growth guru Lawrence Kemp commented in a recent blog post that the mass digital transformation across industries has allowed tech companies, the bastions of growth, to outperform for several years running. Yet growth and disruption are not central to tech alone. Many consumer discretionary, industrial and health care companies are using new technologies to improve the effectiveness of solutions for customers, lower the cost of doing business and, ultimately, drive earnings growth.

Finding attractive prices while avoiding value traps

For value investors, a key strategy is one of disruption avoidance.

Starting price still matters; this is a non-negotiable truism. But beyond price, and perhaps just as important today, is quality. Low price makes no promise of a sizeable return. In fact, with more disruption comes more value traps ― companies that are cheap and likely to stay that way. The pace of change means business models ― whether long-time standards or promising new ideas ― are increasingly vulnerable to upset.

Value investors today need to focus on durable but underappreciated businesses that are less under attack by the disruptors. How to find them? We look for companies with strong economic moats that can protect profits from disruptors. These moats come from varied sources, including brand strength, market structure, cost positioning, and a robust history of R&D investments.

icon-pointer.svgGet more from Tony on investing for quality.

One sector, two distinct opportunities

To illustrate the opportunity in both growth and value stocks, let’s consider the auto sector. The trend toward ecofriendly alternatives means growth investors are finding rich opportunity in disruptors ― makers of electronic and autonomous vehicles. They are likely focused on companies that are leading their industry, have pricing power, and can take market share from the competition.

Value investors, meanwhile, may look to traditional automakers ― select scale operators that are forward-thinking and have made investments to compete even as combustible engines are being pressured by EV and AV advancements. These companies are vital but may be overlooked in a world focused on the next new thing. Value opportunities may also exist in companies that are suppliers to EVs and AVs.

The mixed message in spreads

In a world where the winners keep winning and the losers keep losing, we’re seeing historically wide valuation spreads ― the difference in price-to-earnings (P/E) ratio between the median stock and value (low-valuation) stocks. In fact, looking back at over 40 years of P/E data for the Russell 1000 Index, we have only seen wider valuation spreads three times ― and two were during recessions.

Meanwhile, credit spreads (the difference in yield between high yield bonds and “safe-haven” Treasuries) are narrow at 3.9% versus a long-term average of 5.4%. A scenario of narrow credit spreads in fixed income and wide valuation spreads in equities is unusual. It tells us that fixed income investors are buying value but equity investors are not. These are often the same companies, but investors are seemingly more willing to buy their junk bonds than their equity. It is worth noting that the earnings of value companies have been doing better than their stock price performance. These disconnects suggest to us that there may be room for valuations to rise.

Bottom line

History indicates that growth and value rarely move in tandem. Ultimately, we believe a robust equity portfolio today can benefit from the best of both breeds: Growth strategies able to identify disruptors with sound long-term business models while cognizant of the importance of free cash flow and valuation, and value strategies that are sensitive to the importance of quality and the risks presented by disruption.

Tony DeSpirito is Chief Investment Officer for U.S. Fundamental Active Equity and a regular contributor to The Blog.

The forward price-to-earnings data cited above for the Russell 1000 Index is from Dec. 31, 1978, to Dec. 31, 2019, and sourced from BlackRock’s Quantitative Alpha Research Group.

Credit spread data cited above reflects the Bloomberg-Barclays U.S. High Yield Index option-adjusted spread from Jan. 31, 1994, to Jan. 31, 2020, and is sourced from Bloomberg.

Investing involves risk, including possible loss of principal. There is no guarantee that stocks or stock funds will continue to pay dividends.

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 February 2020 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. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

You should consider the investment objectives, risks, charges and expenses of any BlackRock mutual fund carefully before investing. The prospectus and, if available, the summary prospectus contain this and other information about the fund and are available, along with information on other BlackRock funds, by calling 800-882-0052 or from your financial professional. The prospectus should be read carefully before investing.

Prepared by BlackRock Investments, LLC, member FINRA.

©2020 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other marks are the property of their respective owners.

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Why bonds are still a good hedge

While growing concerns related to the coronavirus, and its potential impact on global growth, resulted in a nominally negative return for January, U.S. equities remain more than 13% above the Q4 low.

The coronavirus still an unknown and unquantifiable risk, coupled with lingering geopolitical tensions in the Middle East and mounting concerns over the U.S.  Democratic Presidential primaries may prompt investors to ask how to best protect their gains. Given a 10-year Treasury yield below 1.60%, bonds may not be the obvious candidate. That said, U.S. Treasuries still look like an effective hedge, which is why investors should maintain a healthy allocation as an insurance policy against equity risk.

Low for very long

Given the magnitude of the four-month stock rally, diminished near-term trade risks and signs of economic stabilization, you would have expected interest rates to back up from their fall lows. Yet, bond yields are virtually unchanged. While interest rates did rise modestly in Q4, rates have fallen substantially in recent weeks. This leaves bond yields just about where they were in early October.

Should stocks continue to rally from here, investors are likely to lose a bit on bonds as interest rates rise to reflect more stable economic prospects. That said, any backup in interest rates is likely to be constrained by the modesty of the expansion and the lack of any pickup in inflation.

Conversely, and the real reason for holding bonds, if stock volatility returns Treasuries are likely to rise and yields will drop even lower. Despite all the anxiety about low bond yields, stock bond correlations remain very negative. In other words, bond prices still tend to rise, and yields fall, when stock prices drop (see Chart 1).

This pattern is also evident when looking at the relationship between stock/bond returns and volatility. Looking back on the post-crisis period, roughly 45% of the variation in stock/bond returns can be explained by weekly changes in equity volatility, as measured by the VIX Index. In weeks when volatility increased, long duration Treasuries typically beat the stock market by roughly 1.5%. When volatility dropped, the relative return reversed, with stocks beating bonds by a similar amount.

What makes bonds most attractive is what happens when volatility really spikes. The “convexity”, i.e. non-linear properties of long duration bonds are most evident when the rise in volatility is outsized. During these weeks, defined by a rise of at least 20% in the VIX, long duration bonds beat stocks by 4% on average, with a 95% success rate!

The point being: At these levels, bonds may not offer much in the way of yield, but they can still offer a good hedge.

Russ Koesterich, CFA, is a Portfolio Manager for BlackRock’s Global Allocation Fund and is a regular contributor to The Blog.

Investing involves risks, including possible loss of principal. Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.

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 January 2020 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and non-proprietary 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. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

©2020 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

The economics of social unrest

Protest movements—most prominently in Latin America, the Middle East and Asia—have become a feature of the geopolitical landscape. Each protest is distinct, with different proximal causes, but there appear to be underlying patterns.

Concentrated wealth and income inequality are a key theme. Median incomes have stagnated around the world in recent decades, while the share of the top 1% of earners has grown sharply, as shown in the chart below. The rising gap between winners and losers has led to middle class discontent. At the same time, declining trust in governments has created a disconnect between the electorate and governing elites. Across the globe, technology is exacerbating the unrest – and has enabled disparate movements to learn from and coordinate with each other.

An economic-political feedback loop

The recent wave of protests has developed against a backdrop of economic expansion and strong asset returns. And to be sure, we expect a moderate uptick in global growth in 2020. But what happens in the next cyclical economic downturn? Some governments may be increasingly constrained – both economically and politically – in their ability to respond.

Monetary policy has little remaining room to provide stimulus, particularly in developed economies: Some countries are already in negative rates territory; many others are close to a lower bound – or the lowest level that rates can feasibly be set without adverse consequences for the financial system. See Dealing with the next downturn for details. Only several countries have decent policy space left – Russia and Mexico, for example.

On the fiscal side, debt levels are already very high, particularly in developed markets. In emerging markets, there is more fiscal space – in countries like Chile, for example – but there is a fine balance between maintaining fiscal responsibility and pursuing well-targeted fiscal spending to address popular demands.

icon-pointer.svg Check out BlackRock’s geopolitical risk dashboard.

These dynamics present additional risks in a context of slower growth. Governments will likely be hesitant to pursue adjustments that could stoke discontent. They may also be wary of policy proposals that could contribute to even greater inequality (as in the aftermath of the 2008-2009 global financial crisis). One area to watch: fossil fuel subsidies. As sustainability and climate concerns increase around the world, governments will face pressure to reduce subsidies. Yet higher fuel prices could spark a popular backlash, presenting a difficult decision for policy makers.

Countries face a number of political constraints, as well. For example, elections are important outlets for expressing popular opinion. Aside from the high-profile campaigns in the U.S., relatively few countries are slated to hold national elections in 2020, making it more likely that individuals take to the streets to express their views. In addition, polarization – across economic, social and political dimensions – is reaching a high point in many countries. This could lead to institutional paralysis, making governance and the management of social unrest even more difficult.

A cyclical downturn would create pressure on the political status quo in many countries. While this may serve to improve the prospects of populist or anti-establishment leaders, such leaders would also find their ability to respond severely limited. Once in power, populist leaders tend to follow an economically unsustainable playbook.

And globally, we have entered into a more competitive and uncertain world order. Cooperative international relationships, and strong multilateral institutions, were critical to managing the 2008-2009 global financial crisis. We see recession risks as contained in the near term thanks to easy financial conditions. But we do worry about global policymakers’ ability to manage the next downturn in an environment in which those global alliances and institutions are weakened or increasingly absent.

Market implications

The market implications of social unrest are mostly local, but can spill across borders: For example, contagion fears saw currencies across Latin America sell off last fall as protests developed.

We worry about fiscal deterioration should unrest continue, particularly given a high level of global debt. Redistribution policies that increase taxes on corporations—alongside a tight labor market that compels companies to increase wages and other benefits—could erode earnings, with implications for stock and corporate bond prices. Such risks underscore BlackRock’s preference for U.S. Treasuries as a source of portfolio resilience.

Catherine Kress is Advisor to the Chairman of the BlackRock Investment Institute (BII) and a contributor to the BII’s geopolitical views.

Investing involves risks, including possible loss of principal.

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 February 2020 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and non-proprietary 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. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

©2020 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

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Why we are still neutral on U.S. stocks

The coronavirus outbreak in late January swiftly shifted the direction in global markets – from an ebullient risk assets rally to an anxious selloff. U.S. stocks had performed in line with global peers, before switching gear to outperform them. We see their performance pattern before late January to reassert itself over the next six to 12 months as growth recovers – and retain our neutral call on U.S. equities.

Analyst estimates on U.S. corporate earnings for a given year have often tended to start in the 10%-12% range in recent history. But the paths through each year – and the correlations with equity performance – can vary widely. See the chart above. Earnings forecasts in 2018 climbed throughout the year due to expectations for tax cut benefits, yet the U.S. equity market suffered its biggest annual loss since 2008 – partly due to tightening financial conditions. In 2019, earnings estimates trended lower through the year, but U.S. equities rallied nearly 30% – fueled by easier financial conditions due to the unusual late-cycle dovish pivot by key developed market (DM) central banks. What’s in store for 2020? We see economic growth returning as a key market driver and an eventual uptick in growth – even if delayed by the coronavirus impact – supporting positive earnings momentum. Yet rising uncertainty around the U.S. election and profit margin erosion typically seen in the late-cycle periods are likely to weigh on U.S. equity performance, we believe.

icon-pointer.svgRead more in our Weekly commentary.

We remain neutral on the outlook for U.S. equities despite encouraging earnings results. About half of the companies in the S&P 500 Index had reported results as of the end of January, with nearly 70% beating analysts’ earnings estimates, according to Refinitiv data. This compares favorably to a long-term average of 64.9%. Analysts currently expect U.S. earnings to grow about 9% in 2020, a hair lower than the typical range for the start of the year. Yet we see that as an ambitious goal given potential for rising wages and other cost increases to further compress corporate margins. Our analysis of U.S. corporate profit margins over the stages of the business cycle since 1965 showed that profit margins have tended to contract in late-cycle periods. High earnings expectations, combined with these late-cycle dynamics and more attractive valuations in other regions, set a high bar for sustained U.S. outperformance.

Rising political uncertainty around November’s U.S. election is another reason for caution on U.S. equities. Last week’s Iowa Democratic caucuses – with their failures to produce timely results or to winnow down a crowded field – offered a taste of the potential for a highly volatile and noisy nine months ahead. A wide range of potential policy outcomes – in areas such as trade and tariffs, taxation, drug pricing, and regulation of energy and technology – could lead companies to defer spending plans and alter business models. This could heighten market volatility compared to recent years.

The bottom line

We stick to our view that global growth will edge higher in 2020 but expect the pickup to be delayed. U.S. equities could outperform on any further growth scares triggered by the coronavirus outbreak, given their quality bias and perceived resilience. But we remain neutral on U.S. equities, given elevated political uncertainties and the risk to margins. Overall, we stand by our moderate pro-risk stance, and expect an eventual growth pickup to support cyclical equity markets, such as EM and Japan. Within U.S. equities we favor quality companies with above-average return on equity, low leverage and strong cash flow.

Kurt Reiman is Senior Strategist for North America at the BlackRock Investment Institute. He is a regular contributor to The Blog.

Investing involves risks, including possible loss of principal.

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 February 2020 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and non-proprietary 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. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

©2020 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

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Coronavirus risks weigh on markets

The coronavirus outbreak that started in China has sent jitters across global financial markets amid fears of a hit to the global economy. We think it is too early to assess the eventual impact on the economy yet see potential downside risks posed by the outbreak – with its unknown magnitude and duration. This underpins our view that U.S. Treasuries provide a source of portfolio resilience.

The outbreak has sparked a classic risk-off response, albeit one of relatively modest magnitude to date. Emerging market equities, airlines and oil prices have declined since Jan. 20, when the Chinese government confirmed the virus can spread from person to person. Perceived safe-haven assets such as U.S. Treasuries, as well as their inflation-protected peers, have gained. See the chart above. The VIX index, a gauge of U.S. stock market volatility, shot up to the highest level since October. Yet the risk-off sentiment has so far been relatively limited, with modest pullbacks in high yield credit and U.S. stocks, even after Friday’s sell-off. The impact from worries about the outbreak may have been partially offset by positive results in the current quarterly earnings season that so far are in line with our expectation for global growth to edge higher this year.

icon-pointer.svgRead more in our Weekly commentary.

What can we learn from past global disease outbreaks? Economic growth and markets have historically responded with a V-shaped pattern. The temporary hit to economic activity results in pent-up demand, which eventually helps fuel the rebound in economic activity. This recovery is typically led by retail and manufacturing sectors, since lost revenues are harder to recoup in the services sector (think of tourism).

It is too soon to gauge the impact of the current outbreak, given the many unknowns related to the coronavirus. These include the duration and severity of the outbreak in China – and whether it remains largely contained geographically. The reduced flow of people and goods due to travel restrictions and quarantine measures are likely to hit demand in the short term, pressuring economic activity in the most affected areas. The extent of the policy response by Chinese authorities to any growth slowdown is another key uncertainty. We are likely to see a meaningful policy response from Chinese authorities to shore up growth, as we have after prior epidemics, though an ongoing desire to rein in financial excesses leaves open the question of how sizable China’s stimulus will be. Another potential difference from past episodes is China’s increased role in the global economy: the country makes up 15% of global GDP today in purchasing parity terms. This is three times its size in 2003, when the world was hit by the SARS virus.

We also see potential supply side disruptions. China is now a key component of global supply chains. Any sustained outbreak could disrupt the supply chains of certain industries, with potential for bottlenecks. This risk echoes one of the messages of our 2020 Global Investment Outlook – that investors should be on the lookout for potential shifts in the economic regime, such as a world in which growth slows as inflation creeps higher.

Bottom line

We still see global growth edging higher this year, given easier financial conditions, a lull in global trade tensions, and generally positive economic data. An encouraging start to the latest quarterly earnings season also underpins our moderate pro-risk stance. Yet the coronavirus outbreak creates downside risks to the growth outlook and underscores our preference for U.S. Treasuries as a source of portfolio ballast against any growth scares.

Mike Pyle, CFA, is Global Chief Investment Strategist for BlackRock, leading the Investment Strategy function within the BlackRock Investment Institute. He is a regular contributor to The Blog.

Investing involves risks, including possible loss of principal.

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 February 2020 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and non-proprietary 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. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

©2020 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

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5 wild cards for bonds in 2020

After a year of outsized returns for both equity and fixed income markets, expectations for 2020 returns have settled closer to their long-run averages: roughly 5% for stocks, and coupon-like returns of about 2% for investment-grade bonds and 5% to 6% for riskier bonds.

What could upend these market expectations? We see five potential disruptors.

1) Politics – Opaque outcome

The biggest “wild card” of 2020: the U.S. presidential election in November, the outcome of which will trickle down to and influence all other issues in 2021 and beyond. These layers of uncertainty could lead to large surprises – in either direction. For investors, political uncertainty is one of the most difficult risks to measure because the outcome, as well as the market reaction, can be very hard to predict. For instance, when it comes to monetary policy and changes in interest rates, investors can guess at outcomes and policymaker reactions to those outcomes and try to assign reasonable likelihoods for different scenarios. Political uncertainties, on the other hand, are typically less amenable to quantification because their outcomes can have a series of cascading effects on other issues.

2) Trade strife – Dormant…for now

Trade was a big issue in 2019. By splitting the U.S.-China negotiations into a Phase 1 agreement—which basically confirms a pause on any further tit-for-tat tariffs—and pushing the deeper, more substantive issues into a future Phase 2 deal, the risk of an escalating trade feud has been temporarily abated. Call it the “olfactory” effect of trade: it might smell bad, but if it doesn’t get worse you eventually stop noticing the smell altogether.  So, though trade uncertainty remains high, as long as it doesn’t increase, then the negative drag from trade negotiations will likely be limited this year.

The politics on trade are multilateral and opaque. Both the U.S. and China have an incentive to pause, but it is doubtful that trade risk will be dormant for all of 2020. By mid-year the democratic nominee will emerge, clarifying for China an alternative to Trump. In turn, Trump may again use acceleration in trade rhetoric to his advantage to secure portions of his base. The Phase 2 issues are the big ones he likely will run on again, so expecting trade uncertainty to remain low throughout 2020 is a good way for the consensus outlook to be disappointed.

3) Monetary Policy – “Appropriate”

Certainly, the policy shift toward interest rate cuts ended up being a critical return catalyst in 2019. For 2020, however, the policy outlook looks generally on hold. The Fed signals policy is “appropriate” (to the situation) and globally, monetary policy expectations for further cuts in Europe, EM and Japan have abated.

icon-pointer.svgWatch the video commentary.

The Fed’s policy stance may be skewed dovish—meaning it may be more likely to lower rates in response to a slowdown than raise rates in response to an uptick in growth or inflation.

4) Valuations – Where do we go from here?

Valuations represent a headwind to return potential in 2020. That partly explains the lowered return expectations relative to last year: higher starting prices in 2019 implies lower returns in 2020.

Low starting yields and tight spreads make further valuation based on price appreciation unlikely for bonds. That leads to expectations for coupon-level returns in the riskier portions of fixed income. The good news is that an absence of recession risks may truncate the downside potential for returns. However, this exacerbates an ongoing trend we have been seeing in markets—investors reaching further and further down in quality in the search for yield.

5) Market vulnerabilities – (Over)reaching for yield?

As the below chart highlights, we observe some unique characteristics in today’s corporate credit markets. The figure compares high yield bond spreads against the credit ratings migration rate. A negative credit ratings migration rate indicates that more firms are being downgraded than upgraded, typical in late cycle environments.

Generally, credit downgrades lead to eventually higher credit spreads, as investors shy away from the riskiest bonds. In 2019, however, a rise in credit downgrades was followed by tighter, not wider spreads. That disconnect fuels concerns of “reach for yield” behavior, adding to future financial vulnerabilities.

From our list of five potential “wild cards” we see political risk and trade negotiations as those most likely to be the main determinant of returns in the year ahead. Yet, given the opaque and highly unpredictable nature of these issues, it is difficult to forecast possible market repercussions.  So for now, we will have to wait and watch how these wild cards play out.

Jeffrey Rosenberg, CFA, is a senior portfolio manager for BlackRock’s Systematic Fixed Income (“SFI”) team and a regular contributor to The Blog.

Investing involves risks, including possible loss of principal.

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 January 2020 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and non-proprietary 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. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

©2020 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

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Quality access to international markets

On an almost daily basis, mainstream and financial news inundate us with reminders of geopolitical and economic uncertainties roiling the world. Investors are ever more confused about the potential impacts of these upheavals on their portfolios. As a result, many investors, perhaps inadvertently, have become even more entrenched in home-country biases. In fact, a recent study (by my colleagues Andrew Ang, PhD, who is the head of BlackRock’s Factor Based Strategies Group, and Patrick Nolan) analyzed nearly 10,000 portfolios and observed that investors chronically overweight U.S. equities and lack meaningful factor tilts in their portfolios.

Yet, by shunning international markets and factors, investors are missing out on a potential diversifier in their portfolios, and an opportunity for long-term growth potential and added portfolio resilience.

Diversified quality exposure to international markets

One way to access international markets while navigating geopolitical and economic unknowns is through investing in a diversified group of high-quality companies via the quality factor. Investing in the quality factor offers above-average exposure to these highly profitable companies with stable earnings and low indebtedness. The quality factor has also historically been more resilient in challenging market environments while still providing much-needed upside market participation. Given prospects for a slowing or weakening global economy, the quality factor may be an attractive investment strategy for deploying capital in international markets.

The iShares Edge MSCI Intl Quality Factor ETF (Ticker: IQLT) is one quality strategy that provides investors with diversified, efficient access to international markets. The strategy seeks to track the MSCI World ex USA Sector Neutral Quality Index, which selects companies with high return on equity (ROE), low leverage, and low earnings variability while still providing diversification across sectors and countries.

icon-pointer.svgRead more from Holly Framsted.

Enhanced return potential

In addition to seeking diversification, investors may also deploy an international quality strategy for the potential to enhance investment returns over time. After all, the quality factor, in addition to the value, low size and momentum factors, is a potentially return-enhancing factor and may be deployed within a portfolio to seek outperformance over the broader market.  We observe that international quality[1] has historically outperformed the broader market[2] over time in the chart below. In fact, international quality has outperformed the broader market by an annualized return of 1.9% with similar risk[3], providing investors not only with enhanced returns, but also with attractive risk-adjusted returns.

Resiliency for uncertain markets

Interestingly, the quality factor has historically sourced much of its long-term out-performance from its resilient characteristics. To better understand the factor’s behavior, we observe the performance of international quality in both positive and negative markets using upside and downside capture ratios. International quality’s lower downside capture demonstrates that international quality has historically outperformed in down markets – meaning that when the broader market posted a negative monthly return, the strategy declined less than the market. At the same time, the quality factor has historically participated in 99% of the upside indicating that the strategy has roughly kept pace with the broader market when the broader market posted a positive monthly return. Overall, this observation confirms that international quality has historically derived much of its outperformance through its ability to provide investors with much needed outperformance in periods of market stress and demonstrates the factor’s resilience.

Quality for the long-term

In a slow growth, uncertain political environment, investing internationally can be challenging even for the most experienced investors. Factors like Quality, may offer a diversified and efficient way to capitalize on potential opportunities outside one’s home market while also building resilience into a portfolio in the event of future bumps in the road. As such, deploying an international quality strategy may be appropriate for investors aiming to diversify their portfolios amid market uncertainty.

Holly Framsted, CFA, is the Head of US Factor ETFs within BlackRock’s ETF and Index Investment Group and is a regular contributor to The Blog. Elizabeth Turner, CFA, Vice President and Omar Karhani, Associate contributed to this post.

[1] International quality represented by the MSCI World ex USA Sector Neutral Quality Index. The Index’s inception date is 10/21/2014.

[2] The broader market is represented by the MSCI World ex USA Index.

[3] Source: Morningstar Direct, annualized excess return from 10/21/2014 to 12/31/2019. Annualized standard deviation is 11.77 and 12.01 for the MSCI Word ex USA Sector Neutral Quality Index and the MSCI World ex USA Index respectively from 10/21/2014 to 12/31/2019.

Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing.

Investing involves risks, including possible loss of principal.

There can be no assurance that performance will be enhanced or risk will be reduced for funds that seek to provide exposure to certain quantitative investment characteristics (“factors”).  Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods. In such circumstances, a fund may seek to maintain exposure to the targeted investment factors and not adjust to target different factors, which could result in losses.

Diversification and asset allocation may not protect against market risk or loss of principal.

This material represents an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular. This document contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

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 the date indicated and may change as subsequent conditions vary. The information and opinions contained in this material 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 material 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 of these views will come to pass. Reliance upon information in this material is at the sole discretion of the viewer.

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

The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

The iShares Funds are not sponsored, endorsed, issued, sold or promoted by MSCI Inc., nor does this company make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with MSCI Inc.

©2020 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

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Meet the Economist: Elga Bartsch

We recently chatted with Elga Bartsch, PhD, the BlackRock Investment Institute’s Head of Macro Research, to learn more about her.

This post features highlights from our discussion, including how the European sovereign debt crisis was a career defining moment and why you’ll find Elga practicing yoga, meditating and painting in her spare time.

It’s the latest installment in an ongoing series of Q&As with BlackRock Investment Institute members. The last one featured Ben Powell.

How did you know you were interested in the economy and research when you were younger?

I was always a curious kid. Growing up in Germany, I became interested in economics when I was still in high school and had the opportunity to take economics classes, which I tremendously enjoyed. There, we discussed a broad range of topics, and I was able to think through quite a lot of economic policy questions. These included how do you deal with the fact that there are some strong cyclical movements in economies affecting people’s job security, or how does the German system of codetermination that gives workers representation on corporate boards affect economic performance. And I was able to understand how crucial these questions are for many important social and political matters.

How did you get into the asset management business?

I started out my career at an economic think tank working on a variety of different topics, focusing on my PhD thesis in the field of environmental economics and managing a post graduate program in applied international macroeconomic policy research. Once I completed my PhD, I wanted to go abroad and initially intended to join an international organization like the OECD or the IMF. But I also remember the first time that I walked onto a trading floor, while I was doing my PhD, and noticed the different energy level or vibration if you will. This piqued my interest and was a factor that drew me to the financial industry. A work environment with such a high intensity and a steep learning curve really attracted me.

When I received job offers from the OECD and Morgan Stanley, I decided to join the investment bank. It was offering a much steeper learning curve; greater freedom to express one’s views and to produce one’s own forecasts; and the ability to be on a more accelerated career path than an official institution would have offered. In the end I worked in the economics research department at Morgan Stanley for more than 20 years, starting as a junior economist and rising all the way to Chief European Economist and eventually Global Co-Head of Economics.

At Morgan Stanley, asset management companies were my most important clients. I would spend a lot of time speaking with them, discussing my macroeconomic views and their investment implications. But I wasn’t involved in the actual investment process itself. So last summer, I decided to move into the asset management itself by joining BlackRock, allowing me to get closer to the investment decisions.

What is your approach as Head of Macro Research for the BlackRock Investment Institute (BII)?

Macro research at BII is different from research on the sell-side in the sense that it tends to be more thematic. Instead of providing point forecasts on selected economic indicators or commenting on monthly data releases, we try to provide differentiated research on the broader themes driving financial markets and the economic debate (read more on BII’s key themes in our latest Global investment outlook). Other key aspects of our work at BII: providing a robust analytical framework – including novel empirical research that goes over and above popular nowcasting indicators; facilitating debate among the investment professionals within BlackRock’s investment platform; and helping BlackRock clients more broadly.

What was the biggest challenge of your career?

The biggest challenge of my career was probably also my biggest career breakthrough, as these two often go hand in hand. For me it was the euro crisis; when in the wake of the Global Financial Crisis, Europe – which I covered as Morgan Stanley’s Chief European Economist – got into some serious trouble due to the possibility of sovereign debt defaults and the specter of countries possibly existing the euro. In a fast-moving environment, I had to gain an understanding of completely new concepts; if you are a developed market economist, you typically don’t have to deal with sovereign defaults and the kind of market dislocation we saw at the time in the euro area.

There were many unprecedented market-moving events that needed a timely analysis, without a playbook to rely on. The news flow was coming in hard and fast, and a lot was at stake for many clients. In this situation, you needed to form a balanced objective view fast, but also aim to be correct more often than not. Because there were so many moving parts, there was enormous demand for macro insights. As a result, economic analysis went from ‘something nice to have’ to ‘a must have’. So, suddenly not only did the meeting and call requests skyrocket, but I was able to connect with a different level of seniority in terms of the investor base. Also, policymakers started to call to understand what was going on in financial markets. So, for me, the euro crisis was a complete game changer career-wise.

What is the toughest part of your job?

What is challenging is that you are doing global economics, in which there are so many moving parts. You need to decide where you are going to spend your time, focusing on where you can find something interesting to say in a reasonable time frame, and you need to get those decisions right.

At any given moment, there are a million different things you could focus on in global economics. You could spend all day watching the news flow rolling in, but you also need to sit down and form your differentiated view on the global macro environment. There are a lot of smart people looking at these issues in the financial industry, the public sector and in academia. So, you need to find a way to say something new that is more likely to be right than wrong and that is different from the prevailing consensus view. If you are just narrating a view that is already fully priced into markets, there is limited value added attached to that. If you happen to share the consensus view, it is important that you ask yourself where it could be wrong and assess the balance of risks to the current market environment.

What is your favorite part of your job?

One of the really fun things about economics is that there are so many different topics to look at using a rigorous framework – from why productivity growth is falling and where we are in the business cycle to the drivers of the present populist backlash and sustainability issues. That there are so many topics that you can apply the analytical framework of economics to keeps it interesting. This variety can also be bewildering. Each time you start to work on a new research project, you effectively jump in on the deep end of the unknown, aiming to understand the key issues and latest academic thinking. If you already know the answer going in, it would not really be research. Then you also need produce robust empirical analysis to back up whatever hypothesis you came up with and pray that the data support the thesis.

By using an economics framework you often are able to reduce complex real-world problems into the key components. I also enjoy interacting with people and debating ideas and viewpoints with a wide range of experts and practitioners. And I consider myself to be particularly fortunate to have such a broad range of talented colleagues to debate macroeconomic views with at BlackRock on a daily basis.

What achievement are you most proud of?

With the benefit of hindsight and seeing how materially women are underrepresented in economics today, I’m particularly proud that I not only studied economics, graduated top of my class and completed a PhD, but also that I went on to a successful career as a market economist in the private sector. Interestingly, my high school economics class started out with three girls out of about 30 students. The other two girls left within the first couple of weeks. For the next three years, I was the only girl in a class with a lot of math geeks, rather unusual in a school that had a 50-50 gender split. But in the course of my career, I realized the fact that I was different from many of my peers translated into an advantage in terms of developing a differentiated view.

What advice would you give to young people just starting out their careers?

I think as you set out, you need to ask yourself ‘where can you make a difference’ in the sense of where are your talents most differentiated. It is important to understand that this tends to often involve pushing yourself out of your comfort zone. While you might feel more comfortable if you are similar to everybody else in your peer group, you will have more to add to the team if you differ in some key aspect. Personally, I also believe that you will have a much more interesting and rewarding career if you try to move out of your comfort zone. This is also what keeps it exciting and will likely make for a faster career progression.

In the financial industry through the dynamics of the broader industry, you are basically forced to move out of your comfort zone almost constantly. My preference has always been for constantly being on the move. The financial industry, being very dynamic and going through a lot of change, basically means even if you remain in a similar seat, what you work on and how you work will change dramatically.  I was definitely pushed out of my comfort zone a few times. But I also pushed myself out of my comfort zone, including by taking on extracurricular activities such as serving on the European Central Bank Shadow Council.

What else are you interested in or involved with outside of work?

Working long hours and traveling quite a bit, I make a conscious effort to spend sufficient time recharging and refocusing. I mainly do this through yoga, meditation and spending time outdoors, especially hiking. But I’m also interested in modern literature and contemporary art, and occasionally, if I find the time, I might even grab my easel and try to get something on a canvas. I was fortunate enough to be given painting instructions by my grandmother when I was little. She was quite an accomplished artist and taught me many things, including the chemical reactions that you need to be aware of when mixing different types of oil colors, and how to really observe the colors and light reflections when painting en plein air.

What do you tend to paint?

Usually, these days, it will be something abstract in either oil or watercolors. I’m no longer attempting to paint anything in nature, but instead allow my imagination to lead the way. It is interesting how quickly it allows you to get into the flow and completely switch off.

For more, watch Elga in the video below, read posts by Elga Bartsch, PhD, and stay tuned for the next interview in this Q&A series.

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 Jan 2020 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and non-proprietary 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. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

©2020 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

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