Buckle Up for Higher Volatility,  Geopolitical Tensions a Prelude to Volatility?

Russ Koesterich, Responsable de Estrategias de Inversión para BlackRock - Martes, 22 de Julio

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A principios de la semana pasada, la renta variable estadounidense volvió a tocar máximos, aupada por los sólidos resultados empresariales, especialmente por parte de las compañías del sector financiero, y una mayor actividad de fusiones y adquisiciones. Sin embargo, el aumento de las tensiones geopolíticas el jueves frenó el ascenso. Hacia el final de la semana vimos cómo las empresas de gran capitalización se recuperaban de las caídas, no así las pequeñas compañías.

    A pesar de los vaivenes del mercado durante la semana pasada, la volatilidad se mantiene baja en términos históricos, lo que nos sugiere que, aunque la renta variable puede todavía experimentar subidas, éstas probablemente estarán acompañadas por un aumento de la volatilidad.

    En este contexto, continuamos sugiriendo a los inversores centrarse en clases de activos que proporcionen cierta protección. En particular, seguimos favoreciendo la renta variable centrándonos en valores estadounidenses de gran capitalización. Además, seguimos siendo partidarios de añadir exposición internacional, especialmente a Asia.

    Es difícil predecir qué puede producir otra caída, pero como suele decirse, "espera lo mejor y prepárate para lo peor". Para los inversores esto implica priorizar clases de activos y regiones que ofrecen valor relativo y que pueden ayudar a mitigar el impacto de una corrección.

Geopolitical Tensions a Prelude to Volatility?
A market rout on Thursday brought to an end an unusually quiet period for financial
markets. Early last week, U.S. equities hit new highs, supported by solid U.S. corporate
earnings, particularly from financials, and more mergers and acquisitions activity.
But on Thursday, rising geopolitical tensions—including the tragic downing of a
Malaysian civilian airliner over Ukraine—finally derailed the rally.
By week’s end, large caps had recovered their losses while small caps continued
to slip. For the week, the Dow Jones Industrial Average rose 1.09% to 17,100, the
S&P 500 Index was up 0.69% to 1,978 and the tech-heavy Nasdaq Composite Index
climbed 0.82% to 4,432. The small-cap Russell 2000 Index lost 0.88% for the week.
Meanwhile, the yield on the 10-year Treasury dropped from 2.52% to 2.48%, as its
price correspondingly rose.
Despite the market swings last week, volatility is still very low by historic standards.
This suggests to us that while stocks can move higher, further gains are likely to be
accompanied by more volatility.
The Consequences of Complacency
Thursday’s sell-off was significant in at least one way: It was the first time since
April 16 that the S&P 500 moved more than 1% in a day. The three-month streak
had not been equaled since 1995.
While the spike in volatility was short lived, it was the first time investors have been
shaken out of their complacency since April. And as the uptick is coming from
historically low levels—the bottom 1% of historical observations—it may have
much further to go. Even at its peak on Thursday, equity market volatility, as measured
by the VIX Index, only reached 15, roughly 25% below the long-term average.
Low volatility suggests investors are complacent and not taking into account the
prospect for bad news. Indeed, there is no shortage of potential triggers for more
turbulence ahead.
To begin, geopolitical risk is clearly rising. If nothing else, last week’s tragedy in
Ukraine demonstrated that the unrest in the eastern part of the country is far from
over. Meanwhile, we are witnessing the continued fragmentation of Iraq and now a
ground war between Israel and Hamas in Gaza.
In addition, investors should be mindful of conditions in credit markets. One of the
major reasons volatility has been suppressed is linked to the unusually accommodative
Russ Koesterich, Managing Director, is
BlackRock’s Global Chief Investment
Strategist, as well as Global Chief
Investment Strategist for BlackRock’s
iShares business. Mr. Koesterich was
previously Global Head of Investment
Strategy for active equities and a senior
portfolio manager in the U.S. Market
Neutral Group. Prior to joining the firm in
2005, he was Chief North American
Strategist for State Street Bank.
Low volatility suggests
investors are complacent
and not taking into account
the prospect for bad news.
Indeed, there is no shortage
of potential triggers for more
turbulence ahead.
It’s the question on everyone’s mind. And fortunately, there are
answers. Visit blackrock.com for more information.
so what do i do

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or
solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of July 21, 2014, and
may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary
and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to
accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass.
Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing
involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility
of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income
investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market
value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest
payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

monetary policy of the Federal Reserve and a very benign credit cycle. Should the
Fed raise interest rates sooner than expected and foster a less accommodative
regime, that would likely be associated with a further rise in volatility.
So What Do I Do With My Money?
Even a modest pickup in volatility will feel different compared to the placid
environment of the past several months. We would continue to suggest investors
emphasize asset classes that provide some cushion, primarily vis-à-vis less
challenging valuations. In particular, we would favor an equity mix geared toward
U.S. large caps, particularly in energy and “old tech,” and would avoid the momentum
names in social media.
Last week was a good reminder of why we advocate this approach. Large caps
managed to recoup their losses, while small caps—where the price-to-earnings
ratio is nearly twice that of large caps—ended the week modestly lower. And more
speculative sectors that look even more expensive, such as biotech, suffered the
most. Last week’s action also confirms our recommendation for smaller exposure
to retailers and consumer discretionary companies, which are also expensive,
trading at nearly a 25% premium to the broader market. Retail sales disappointed
again in June; year-to-date sales are averaging just 3.5% year-over-year growth
versus 4.2% in 2013 and over 5% in 2012.
In addition, we’d still advocate bringing up international exposure, particularly in
Asia. The recent improvement in Chinese economic data has provoked the beginning
of a rotation back into emerging markets (EMs). Last week was the sixth consecutive
week of inflows into EMs, which suggests sentiment toward the asset class is
starting to turn.
It is difficult to predict what could trigger another sell-off. But as the old saying goes,
“Hope for the best, prepare for the worst.” For investors, that means emphasizing
asset classes and regions that offer some

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