BlackRock has a “worsening macro outlook” and sees little chance of a perfect economic scenario, but likes these 3 pockets of value in the market.

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The Fed raised its benchmark interest rate by 0.5% to fight inflation, marking its biggest increase in more than two decades.

Since the rate hike announcement, the S&P 500 has fallen 7%, bringing its year-to-date loss to 18%. And asset management giant BlackRock isn’t expecting a rally any time soon.

“We de-risk a worsening macroeconomic outlook: the commodity price shock and slower growth in China,” writes Jean Boivin, director of the BlackRock Investment Institute in a recent note to investors. “We also see little chance of a perfect economic scenario of low inflation and growth developing.”

That said, the leading asset manager notes that the recent sell-off has “restored some value into the pockets of the market.”

Here’s a look at each of them.

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european government bonds

With the Russian invasion of Ukraine, Europe is a tough place to invest today. But that hasn’t stopped BlackRock from liking one particular asset class in the region: government bonds.

“We’ve gotten excited about European government bonds because we think market expectations of rate hikes by the European Central Bank (ECB) are too aggressive,” says Boivin.

He points out that the energy shock due to the war between Russia and Ukraine “will hit Europe hard”. And according to Boivin, the ECB will be in no rush to raise interest rates.

BlackRock is updating European government bonds to neutral.

Investment Grade Credit

BlackRock is also updating credit debt from investment grade to neutral.

Not all bonuses are the same. Some borrowers are more likely to pay off their debt than others. When a bond receives an investment grade rating, it means that it has a relatively low risk of default.

“We are seeing some value in IG credit as annual coupon revenue approaches 4%. That’s the highest it’s been in a decade,” says Boivin.

These days, it’s easy to get investment-grade credit exposure. For example, the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) gives investors access to more than 1,000 high-quality corporate bonds in a single fund.

US and Japanese Stocks

Stock markets around the world are having a tough time in 2022, but BlackRock is not fully recovering. In this environment, BlackRock prefers stocks from developed markets to stocks from emerging markets, highlighting two countries in particular.

“Overall, we remain overweight equities, with a preference for US and Japanese stocks, and underweight US Treasuries,” writes Boivin.

There are many ways to invest in the US stock market. You can choose individual actions yourself. Or, you can get exposure to groups of stocks using ETFs.

If you simply want to track the S&P 500 index, consider low-cost funds like the Vanguard S&P 500 ETF (VOO) or the iShares Core S&P 500 ETF (IVV).

For those who want to invest in specific sectors of the stock market, names like Financial Select Sector SPDR Fund (XLF) or Energy Select Sector SPDR Fund (XLE) will do the trick.

ETFs also allow you to invest in Japanese stocks. The iShares MSCI Japan ETF (EWJ) provides exposure to large and mid-sized companies in Japan. Meanwhile, the WisdomTree Japan Hedged Equity Fund (DXJ) allows investors to access the country’s stock market while protecting themselves against exchange rate fluctuations.

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