Russ Koesterich:  With global equity markets up over 100% from their 2009 lows, many investors are questioning whether it is time to lower their strategic allocation to stocks.  While there are no shortages of risks facing global equity markets, overall we find that most markets are fairly valued and arguably already reflecting some of the risks – particularly higher inflation and interest rates – that are likely to challenge the global economy.  We believe that over the long term, equities are still likely to produce higher nominal (inflation-adjusted) and real returns than other financial assets.  We base our view on the long-term returns to equities – both real and nominal – and current valuation levels.

Historically, returns to equities have been consistently higher than other asset classes.  This is to be expected from financial theory, as equities are more volatile than bonds or cash.  On a real or inflation-adjusted return basis, equities have also outperformed – if you include emerging markets – other asset classes throughout most regimes.  The major risk to equities remains a low growth/high inflation or ‘stagflation’ environment.

In addition to their long-term track record, today equities have another advantage: they are reasonably priced relative to other financial assets.  Many investors remain underweight stocks following the dismal performance of the asset class during the previous decade.  The period from 2000-2009 represented the worst 10-year stretch for equities since the 1930s.  We would argue the principal cause of last decade’s negative real returns was the absurd valuations of most equity markets in early 2000.  While global stocks are no longer as cheap as they were at the 2009 bottom, current valuations are at or modestly below their long-term average.  This suggests that multiple contractions, of the type we witnessed over the previous ten years, should not be an impediment to global equity returns over the coming years.  While investors need to be modest in their expectations, on a relative basis equities are likely to produce reasonable long-term returns.

Potential iShares Solution

iShares MSCI ACWI Index (NASDAQ:ACWI), iShares MSCI ACWI ex US Index (NASDAQ:ACWX), iShares S&P 100 Index (NYSE:OEF), iShares S&P Global 100 Index (NYSE:IOO), iShares Barclays 20+ Year Treas Bond (NYSE:TLT).

Overweight
Equities	ACWI – iShares MSCI ACWI Index Fund (click here for fund details)
Mega Caps	ACWX – iShares MSCI ACWI ex US Index Fund (click here for fund details)
	OEF – iShares S&P 100 Index Fund (click here for fund details)
	IOO – iShares S&P Global 100 Index Fund (click here for fund details)
Underweight
Treasuries	TLT – iShares Barclays 20+ Year Treasury Bond Fund (click here for fund details)

Read and listen to the full iShares Market Perspectives for June 2011.

Source: Bloomberg

International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Bonds and bond funds will decrease in value as interest rates rise. An investment in the Fund(s) is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

The iShares Funds are not sponsored, endorsed, issued, sold or promoted by MSCI Inc., or Standard & Poor’s, nor are they sponsored, endorsed or issued by Barclays Capital. None of these companies make any representation regarding the advisability of investing in the Funds. Neither SEI, nor BlackRock Institutional Trust Company, N.A., nor any of their affiliates, are affiliated with the companies listed above.

Written By Russ Koesterich From The iShares Blog

Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist as well as the Global Head of Investment Strategy for BlackRock Scientific Active Equities. Russ initially joined the firm (originally Barclays Global Investors) in 2005 as a Senior Portfolio Manager in the US Market Neutral Group. Prior to joining BGI, Russ managed several research groups focused on quantitative and top down strategy. Russ began his career at Instinet in New York, where he occupied several positions in research, including Director of Investment Strategy for both US and European research. In addition, Russ served as Chief North American Strategist for State Street Bank in Boston.

Russ holds a JD from Boston College Law School, an MBA from Columbia Business School, and is a holder of the CFA designation. He is also a frequent contributor to the Wall Street Journal, New York Times, Associated Press, as well as CNBC and Bloomberg Television. In 2008, Russ published “The ETF Strategist”(Portfolio Books) focusing on using exchange traded funds to manage risk and return within a portfolio.

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3. The Case For A Short-Term Market Bull Rally; And How Investors Should Play It (GLD, SLV, USO, DIA, SPY)
4. State Street Files For The SPDR MSCI ACWI IMI ETF
5. The Continuing Case For Mega Caps (OEF, IOO, DVY, IDV, HDV)

IOO, NASDAQ:ACWI, NASDAQ:ACWX, OEF, TLT