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As stocks continue to scale new heights in an 8-year-old bull market, BlackRock strategists say investors still aren't taking enough risk.
The world's biggest asset manager, handling some $5.4 trillion for clients, dismissed fears that the equity rally is at risk of derailing due to old age and complacency. Instead, its experts believe that many investors continue to miss out on a run that still likely has a few years left.
"We know that many investors have been cautious about investing in risk assets really since the global financial crisis, and recently that caution was ironically exacerbated by a period of low market volatility," Richard Turnill, global chief investment strategist at BlackRock, told journalists at an investment roundtable Tuesday morning.
As volatility has declined, valuations have risen and fears have grown that the post-crisis bull run is near a close.
Turnill said the slow pace of economic gains actually suggest that the recovery has room to run and the timing of the next recession "could be measured in years rather than quarters." Still, he said, investors remain afraid.
"When we look more broadly, we don't see systemic risk," he said. "Potentially, many investors are still not taking enough risk."
His remarks come, however, as investors to appear to be getting more confident and coming in from the sidelines.
Bank of America Merrill Lynch's gauge of where Wall Street managers are positioned indicates that stock allocations and optimism are at their highest levels since 2011. The American Association of Individual Investors' most recent asset allocation survey shows stock allotments for retail investors are at 68.8 percent of portfolios — the highest level since 2005.
While BlackRock remains strongly bullish on equities, it is recommending diversifying away from the U.S.
The firm is neutral on U.S. stocks, "which should not be interpreted as a bearish view on the U.S., but rather we think the performance outside the U.S. in international stocks will outpace the U.S.," said Kate Moore, chief equity strategist. Indeed, she said U.S. stocks continue to have upside based now on fundamentals, rather than the previous drivers that included loose Fed policy and the lack of better alternatives.
BlackRock is now overweight both emerging markets and Europe.
"Emerging market earnings have improved considerably after five years of very weak performance, and the equity markets have participated a little bit on the upside," Moore said. "But there's a lot more room to grow, we believe, in terms of markets pricing fundamentals."
BlackRock is the largest provider in the world of exchange-traded funds, the passive investing instruments that track indexes rather than relying on managers to pick individual stocks.
The firm has $1.17 trillion in ETF assets under management, and its iShares Core S&P 500 ETF has taken in $17.8 billion in 2017, the most of any passive fund. Its iShares Core MSCI EAFE fund, which tracks global equities excluding the U.S., has hauled in just shy of $13 billion, while the iShares Core MSCI Emerging Markets fund has seen $11.1 billion in inflows, rounding out the top three this year in the $3 trillion ETF space.