Market Segments to Consider While the Fed Holds

Investors have spent much of the last couple of months fixated on the Federal Reserve (Fed). In the end, last Thursday, the central bank did exactly what most had come to expect: nothing.

After a day to deliberate how to interpret the Fed’s decision to hold off on raising interest rates, investors took the Fed’s hesitancy as a sign of global economic fragility. Stocks reversed course on Friday, giving up their gains for the week, and market volatility (as measured by the VIX index) quickly spiked back to above average levels after dropping below 20 early in the week, according to data accessible via Bloomberg.

Amid renewed volatility and the Fed’s continued delay, are there any moves to consider? As I write in my new weekly commentary, “With the Fed Holding, an Opportunity to Make Moves,” after the recent selloff, two areas of the market may now be worth added exposure.

Two Market Segments to Consider


Were interest rates rising, one would expect these bond market proxy segments to suffer. However, with long-term rates clearly stuck, utilities look less vulnerable. This is particularly true when you consider that this sector, represented by the S&P 500 Utilities Index, has dramatically underperformed the rest of the broader S&P 500 market this year, according to Bloomberg data. So, it may be time to consider bringing exposure to U.S. utilities back up toward a market weight.


A more contrarian play could be revisiting EMs. Last week’s soft economic data out of China led to another selloff in China’s equity market. Domestic Chinese stocks were down between 3 percent and 6 percent, although H-Shares, traded in Hong Kong, managed to end the week higher, as market data from Bloomberg show.

However, other EMs fared better, according to the data. Markets posted solid gains in India, South Korea, Turkey and even Brazil. The turn in performance was also accompanied by a marginally positive week of flows into broad EM funds, according to market flow data.

It’s too early to call a bottom in EM, and there could be more volatility ahead, but valuations now appear attractive. At the recent lows, EM equities were trading at less than 1.3 times book value, and the current price-to-book ratio is the lowest it has been since the end of the financial crisis. It also represents a 35 percent discount to developed markets, the largest discount in 12 years, according to my analysis using Bloomberg data. For investors with little or no exposure to this asset class, now may be a reasonable time to consider slowly establishing or reestablishing positions. The bottom line: With the Fed on hold, there may be an opportunity to make some contrarian moves.

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The Blog.

© BlackRock

© BlackRock

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