Preparing For The Return Of Volatility

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March 9, 2016 4:15pm NYSE:EWJ NYSE:NEAR

technical bounceThink markets have calmed? As BlackRock’s Heidi Richardson suggests, the stage is still set for more volatility, and there are steps investors can take to prepare for it.

Obormot / Shutterstock

Obormot / Shutterstock

Although markets have been relatively stable the last couple of weeks, that doesn’t necessarily mean the turbulence we’ve seen this year is behind us. After all, the catalysts for the volatility we saw in January and February are still here: excess supply putting pressure on oil prices, disappointing earnings, and slowing global growth. Add to this a highly unusual election season in the U.S. and uncertainty surrounding China and the stage is set for volatility to remain with us in 2016.

In times like these, the temptation for investors is strong to run to the sidelines and exit the market. But it is very difficult to time the market and miss out on rallies if – or when – they occur. Instead, look for potential opportunities that may help strengthen a portfolio, and seek some stability and growth in these constantly changing markets.

Specifically, here are three actions to consider in these markets:

Seek ballast with short duration bonds

Shorter duration bonds, or bonds that mature within three years, can potentially offer a portfolio stability during market volatility. Historically, we have seen short duration bonds have a lower correlation to stocks, which can be a beneficial ballast when equity markets are down. Additionally, bonds typically generate regular income for investors, which can potentially help stabilize portfolios when equity markets decline.

Focus on high quality companies with growth – or income – potential

As volatility increases and returns are harder to come by, investors should consider looking to high quality companies, which may be better positioned in this difficult environment, as well as dividend growers, which potentially may offer steady income.

When we say “high quality” companies, we are referring to companies characterized by high profitability, steady earnings, and low leverage.

This may seem obvious, but we are looking for financially healthy companies that can weather the markets and volatility.

Additionally, exposure to companies that have the potential to sustainably increase dividends over time may be an opportunity to target steady growth – as well as income that can help provide some buffer from volatility.

Look for growth opportunity abroad

Despite slowing global growth, there are attractive potential opportunities outside the U.S. For example, Japanese stocks continue to offer relative attractive valuations, especially in comparison to other developed markets. Additionally we believe the Bank of Japan will continue to deliver market-friendly monetary easing policies in 2016 similar to the stimulus from QE and shareholder-friendly activities we saw in 2015.

Overall, we expect volatility to be ongoing throughout 2016, making it potentially a more difficult environment for investors. But it is important to keep it in perspective, focus on your long-term objectives without fleeing to the sidelines at the worst moment, and keep an eye out both for opportunities – as well as ways to strengthen your portfolio.

Exchange traded funds (ETFs), such as the iShares Short Maturity Bond ETF (NYSEARCA:NEAR), the iShares MSCI USA Quality Factor ETF (NYSEARCA:QUAL), the iShares Core Dividend Growth ETF (NYSEARCA:DGRO), and the iShares MSCI Japan ETF (NYSEARCA:EWJ), can provide access to short duration bonds, high quality companies, and Japan.

Heidi Richardson is a Global Investment Strategist at BlackRock. She is also Head of Investment Strategy for U.S. iShares.

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