BlackRock's Rieder says investors should hold more bonds, international stocks should outperform

Published Wed, Feb 1 202310:31 AM ESTUpdated Wed, Feb 1 202311:16 AM EST

Patti Domm @in/patti-domm-9224884/@pattidomm

BlackRock's Rick Rieder said the 60/40 portfolio should be flipped to 40% stocks, 60% bonds this year, and that international stocks should outperform U.S. equities. Rieder, chief investment officer for global fixed income at the world's largest asset manager, said he finds U.S. stocks less interesting relative to bonds. The traditional 60/40 portfolio — with 60% invested in equities and 40% in bonds — failed on both fronts in 2022. Both stocks and bonds were sharply lower, and the traditional benefits of one asset class hedging the other did not work. "I think the marginal dollar has to be very much tilted towards 40/60, if not higher than that," said Rieder. "If you're a long-term investor or pension fund that's investing for the very long term, equities still do their job," he said. But bonds now offer a much better return than they previously had. "To be able to buy high quality things like investment grade credits, agency mortgages, high quality securitized assets without going far out the yield curve, and they can generate 5%, 6% or higher yields, this is a 20-year boon for investors," Rieder added. Still, he sees stocks ending the year higher. Rieder expects the Fed to raise rates by a quarter-point Wednesday, and follow it with possibly two more quarter-point hikes. He thinks the economy should see a soft landing, and inflation will continue to fall. "If you said to me this year, do I think you'll have mid-to-high single digit returns in equities? I could still see that," said Rieder, who is also head of BlackRock's global asset allocation team. But investors now can create a quality fixed income portfolio that yields 6% without a lot of duration, credit or liquidity risk. "Why wouldn't you do that? So the marginal dollar should go into fixed income," he said. Rieder said bonds are a better value than U.S. stocks. "The multiple on stocks still hasn't come down enough," he noted. "I think they'll end up the year with a decent performance because the economy is in okay shape, but for the time being as margins compress, and we get more news on central banks, more news on the economy, I think bonds are much more attractive." International stocks over U.S. equities International stocks could also outpace U.S. stock. "I like them better than the U.S.," he said. "I think one of the keys for 2023 is to get more global." He said foreign markets have become more attractive with the lower dollar. "With China's opening, Chinese equities are interesting," he said. "European equities, some of the banks, the values there are attractive. I like some the global equities a lot more than the U.S." He also is looking to global fixed income markets. "I also think Europe, suddenly investment grade in Europe because you can swap it back to dollars, is attractive," he said. "We very slowly have been adding to emerging markets. ... With the dollar more stable, emerging market yields, particularly local rates, the yields you can lock in, are pretty attractive. You have to take a little bit of currency risk, but we're in a different environment versus last year." Rieder said he has recently started looking further out the yield curve, at longer duration assets like agency mortgages and investment grade bonds. "For the first time in the last couple of months, you could start to move further out the curve, get out to the 3-year or the 5-year, lock in some of these high quality yields," he said. "These are good levels to be an investor in fixed income." Rieder reiterated that he expects the U.S. benchmark 10-year Treasury yield should range between 3.25% and 4% this year.