The S&P 500 Index (GSPC) pulled back from its 5-year high on Monday and stocks continued their downward slide in early trading Tuesday.

Russ Koesterich, chief investment strategist at BlackRock, expects a good year for equities even though he predicts markets will remain volatile in the first half of the year. In an interview with The Daily Ticker, he says emerging markets offer the most upside to investors in 2013.

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Koesterich is particularly bullish on China, India and Brazil, former market darlings that have struggled to maintain their once torrid growth rates in the face of a global slowdown. Investor pessimism has made emerging markets relatively cheap now that inflation fears have subsided and local economies have begun to show signs of life.

Koesterich urges investors to directly invest in Chinese, Brazilian and Indian stocks but says U.S. multinationals still offer some benefits since they're exposed to the improving market conditions in these countries.

According to FactSet data, Brazil's Bovespa stock market is up about 2% in one year compared to 3% for the Shanghai Composite Index (A shares) and 25% for India's Sensex Index.

International equities may rule in 2013 but Koesterich prefers U.S. stocks to bonds any day.

The BlackRock strategist believes the secular bull market in Treasuries is over and says bonds may be “perceived as riskless…but the reality is they’re more risky than people realize.”

He’s not calling for a “meltdown” in the Treasury market but predicts rates will grind higher in the second half of the year. Koesterich prefers corporate and municipal bonds for investors looking to get some yield with balanced risk.

Over the long term investors should reduce their fixed income allocations because “too much exposure to interest rates will lead to a drag on portfolio performance,” according to Koesterich.

Related: Bill Gross: Fed's "Hot Air" Will Keep Bond Bubble Afloat in 2013

Ongoing budget discussions in Washington present the biggest macro risk to U.S. markets this year, according to BlackRock. The firm sees U.S. growth in the 2% range due to a "strengthening housing market and robust energy sector."

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