What to buy in stocks, bonds and credit for a lower risk strategy

  • Investors should reduce risk now, according to the BlackRock Investment Institute.
  • But Jean Boivin says some pockets of opportunity are starting to emerge as stocks and bonds fall.
  • He recommends a few changes investors can make with ETFs and remains bullish on stocks.

Some surprising and scary things are happening in the markets right now, so it might be useful to know what the world’s leading fund managers are doing to keep client funds safe.

BlackRock is the largest company in this space, managing $9.57 trillion in assets at the end of the first quarter. As stocks and bonds go through a rare simultaneous selloff, Jean Boivin, the head of the BlackRock Investment Institute, says a few steps are in order.

“We are slightly reducing risk on a deterioration in the macro outlook,” Boivin wrote in a recent note to clients. “We also see little chance of a perfect economic scenario of low inflation and growth.”

But Boivin pointed out that even in a market where there seems to be nowhere to turn, there are still opportunities – after all, almost everything gets cheaper in a hurry.

“This year’s spectacular sell-off restored some value to pockets of the market,” he said. “We warmed up European government bonds because we think market expectations for rate hikes by the European Central Bank (ECB) are too hawkish.”

In other words, he thinks the ECB will not raise interest rates as quickly as investors think. Boivin says the bank will proceed with caution due to the energy shock facing Europe following the Russian invasion of Ukraine, which disrupted natural gas supplies and drove up energy costs for nations, businesses and consumers.

Boivin says he finds bonds generally unattractive, but in this case it makes sense as a way to reduce the risks posed by a “growth shock” hitting European equities.

HOW TO: Examples of funds that hold a wide range of European government bonds include Vanguard’s EUR Eurozone Government Bond UCITS ETF and the iShares Euro Government Bond Index Fund.

Boivin also claims that premium credit becomes reasonable value play.

“Annual coupon income is approaching 4%. This is the highest in a decade,” he said. “We are overweight EM local currency debt due to attractive valuations and potential earnings. A large risk premium compensates investors for inflation risk, in our view.”

He raised both European government bonds and prime credit to “Neutral”.

HOW TO DO IT: Many large companies offer investment grade credit funds, including PIMCO’s Investment Grade

Corporate bond

Index ETF (CORP) and the Goldman Sachs Access Investment Grade Corporate Bond ETF (GIGB).

But what about stocks?

While rising interest rates and a more fragile growth environment are not good news for equities, Boivin is more bullish on equities than the broader picture suggests. Earlier this year, when the market started to sell off, it pushed stocks higher because real rates are low, growth remains strong and valuations have fallen.

He says that hasn’t changed – other than valuations falling a lot more – so he’s still overweight equities. He says the

Federal Reserve

will follow the same path he predicts for the European central bank, which means that it will not raise interest rates very high because it does not want to cause a


. This means that inflation will remain higher than it was in the 2010s.

“We believe the Fed will ultimately not raise rates beyond neutral — a level that neither stimulates nor diminishes economic activity,” he said. “We believe that the eventual sum total of rate hikes will be historically low, given the level of inflation. This means that we still favor equities over fixed income securities.”

Boivin says he prefers stocks from developed markets to stocks from other regions, and is particularly bullish on US and Japanese stocks. Meanwhile, he turned bearish on Chinese equities and downgraded them to “Neutral”, urging investors to reduce their allocations.

“The growth outlook for China, the world’s second-largest economy, is rapidly deteriorating amid widespread shutdowns in a bid to halt the spread of Covid,” he said. “Foreign investors could face more pressure to avoid Chinese assets for regulatory or other reasons” – including China’s relationship with Russia.

This concern also extends to Chinese bonds, as yields have fallen, eliminating the appeal these securities once had.