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Be careful of 'hidden momentum': Koesterich

As investors look toward the rest of the year, they need to be careful with momentum stocks, particularly those whose momentum is "hidden," BlackRock global chief investment strategist Russ Koesterich said on Tuesday.

That's because although volatility has been fairly low so far this year, it has been rising since 2014, and if the Federal Reserve starts to normalize interest rates in the back of the year, volatility is expected to increase, he explained.

"Historically that's been a problem with momentum stocks. The tricky thing this time is that some of the names you don't normally associate with momentum, such as yield plays, might be the some of the most vulnerable," Koesterich said in an interview with "Power Lunch."

He thinks defensive dividend plays such as utilities and REITS are likely to be affected, "even with a modest backup in rates."

Russ Koesterich, Global Chief Investment Strategist, BlackRock
Adam Jeffery | CNBC
Russ Koesterich, Global Chief Investment Strategist, BlackRock

As for how to make money this year, Koesterich said he believes technology will continue to do well, and said consumer discretionary will do better if consumers start opening their wallets.

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He also likes Chinese H shares, which are shares of companies incorporated on the Chinese mainland that trade on the Hong Kong Stock Exchange.

"We've seen a big rally in China. The rally has not been as pronounced for the H shares. Those look to be a better bargain," Koesterich said.

James Liu, global market strategist with JPMorgan Funds, is also looking for opportunity outside the United States.

While he still likes U.S. equities for the rest of the year, he thinks that diversifying into Europe makes sense.

"European markets are up something on the order of 15 percent so far this year," Liu told "Power Lunch."

"Even after you adjust for the dollar, we're talking about a 4 percent return, which is more than double what we're seeing in the United States for the first quarter."

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