The global chief investment strategist at $6.8 trillion BlackRock told us his 2 favorite trades to profit from a major shift that's happening as recession fears fade away
- The fear of a recession this year supercharged defensive stocks that are favored for their ability to thrive during downturns.
- With an imminent recession no longer a burning concern for many investors, BlackRock and other Wall Street firms are recommending a tilt to assets that benefit from an economic rebound.
- The global chief investment strategist shared with Business Insider an additional recommendation for what to own if the economy continues to avoid a recession.
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Stock-market investors were rewarded this year for buying companies that would weather a recession with greater resilience.
But that turned around in the fourth quarter as it became clearer that Wall Street's worst fears of a downturn would not materialize. Thanks to resilient consumer spending, the economy withstood the threats that stemmed from the trade war.
The S&P 500 also shrugged off these concerns with a rally to new highs, led in the fourth quarter by so-called cyclical stocks that benefit from economic upswings. The outperformance of cyclicals is expected to persist not just in the US but globally, according to Mike Pyle, the chief global investment strategist at BlackRock, which is the world's largest money manager with $6.8 trillion in assets.
But he's not expecting the broad rally to continue unabated in the US. BlackRock has tempered its expectations for returns going forward and downgraded its view on US stocks to neutral from overweight. The firm is skeptical of an encore in light of the uncertainty that will surround the 2020 election, and following one of the strongest calendar-year gains this bull market might see.
And so although Pyle recommends exposure to cyclicals, he specifically flagged non-US assets as sources for the returns that may be accrued.
Namely, he sees emerging-market debt and Japanese stocks as "high-conviction" sources of outperformance going forward.
Besides his recommendation for cyclical stocks, Pyle also recommends owning quality stocks, which are favored for their strong balance sheets.
Companies can get away with having a lot of debt on their balance sheets and embarking on money-losing ventures during the good times. It's especially been rewarding during this bull market when the cost of financing debt was extraordinarily low.
However, investors start to care about strong balance sheets when the going gets tough for consumers. And this cohort of stocks is one of Pyle's recommendations for investors right now.
He noted that this recommendation might at first contradict his ongoing affinity for assets that benefit from a cyclical rebound. His explanation is that buying quality stocks would provide portfolio resilience for the late-cycle environment investors find themselves in, and offer potential upside if there's indeed an economic rebound.
In other words, quality is the sweet spot now that stocks are neither staring down an imminent recession nor likely to soar into the stratosphere.
BlackRock's own iShares Edge MSCI USA Quality Factor exchange-traded fund contains companies that have been handpicked for having strong returns on equity, earnings variability, and debt-to-equity ratios. According to Pyle, some of these firms are large, global companies that are exposed to trade and would benefit if the US and China make progress on an agreement in 2020.