NEW YORK (TheStreet) --- Economies of emerging and developed countries
will further diverge in 2011, says Russ Koesterich, iShares chief
global investment strategist. The best way to take advantage of that
so-called economic decoupling is to purchase single-country ETFs in
the fastest-growing emerging economies.
_TheStreet_ spoke with Koesterich about his forecasts for the New
Year.
_What is your economic outlook for 2011?_
*Koesterich:* For next year, we are going to be looking at what I call
an economic decoupling. The developed world will continue to grow,
albeit at a slow pace. Emerging markets, however, will grow much
faster, particularly in places like India and Brazil.
_How do you play this economic decoupling with exchange traded
funds?_
*Koesterich:* The good news for 2011 is that it's going to be a good
environment for equities. Even though growth is going to be slow, it
will be fast enough to help earnings. You have low inflation and low
interest rates. So investors want to do a couple things. First, they
should leverage themselves to emerging-market growth. That means an
overweight to sectors like industrials and technology. Also, they
should use single-country ETFs to get exposure to those faster-growing
markets.
You say in your latest note that there's a 25% chance of a double-dip
recession. What should an investor do under that scenario?_
*Koesterich:* If the developed world falls back into recession, you
want to get much more defensive. I happen to think that *U.S.
Treasuries* look very expensive right now. But under that scenario, I
want to overweight longer-duration bonds by buying, for example, the
*iShares Barclays Aggregate Bond ETF*(AGG). I want to overweight the
dollar, because I want that safe-haven bid. And within my equity
portfolio, I want stocks and sectors that have pricing power in a weak
environment. Traditionally that has meant consumer staples and health
care.
In your latest note you also say there's a 10% chance of an
inflationary scenario. What do you buy if that comes to fruition?_
*Koesterich:* The inflation portfolio looks very different. In the
first year or two when inflation is picking up, you want to
underweight equities because you tend to get multiple contraction.
Obviously, you want to underweight bonds, with the exception of TIPS.
I would buy the *iShares Barclays TIPS ETF*(TIP) in this scenario. And
then take a larger position in commodities. Within commodities,
precious metals, particularly gold have historically performed the
best.
Finally, you say there's a 10% chance of a Goldilocks scenario with
low inflation and strong growth. What do you do in that environment
--- just load up on stocks?_
*Koesterich:* Exactly. We would love to get back to the wonder years
of the late 1990s, but I don't think it's likely. If it were to
happen, then equities would do best. So we would advise a heavy
position in equities, especially riskier stocks and those stocks that
do well when the economy is strong, like the cyclicals.
Source: Thestreet.com
