Ukraine crisis rattling investors not helped by weak US consumer confidence says BlackRock

19th March 2014

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Geopolitical events are rattling investors not helped by weakening consumer confidence in the US says Russ Koesterich, BlackRock’s Global Chief Investment Strategist.

In a note issued today, the manager says: “The possibility of economic sanctions being enacted is rising, and while those measures would likely have little direct effect on the U.S. economy, the risk of escalating geopolitical tensions is undermining investor confidence. It doesn’t help matters that the turmoil in Ukraine is occurring at the same time that U.S. consumer confidence is already weakening.”

Koesterich says that weak consumer confidence is a key reason why retail spending remains lacklustre. “The latest retail sales report shows a rebound in February, but also revises January’s reading sharply downward. On a year-over-year basis, retail sales are growing at a pace of just 1.5%, the slowest rate we have seen since 2009”.

He says last week’s market downturn does raise the question of how vulnerable stocks might be though volatility has remained relatively low. The note says: “While we continue to believe the long-term prospects for equities remain sound, we would point out that despite last week’s spike, volatility across financial markets is still relatively low. Additionally, stock prices are close to their all-time highs, which suggests they are not factoring in a lot of bad news. As such, should the situation in Ukraine deteriorate, stocks could be vulnerable in the near term”.

The firm says it remains cautious toward consumer-related companies. “Both the consumer discretionary and consumer staples sectors are trailing the broader market and are in negative territory on a year-to-date basis, but they still appear expensive. The consumer discretionary sector is currently trading with a valuation of 21 times trailing earnings, the highest of any market sector. If consumer spending does not rebound in the coming months, these areas of the market are likely to continue to underperform”.

He adds that there are also specific risk from the crisis in Ukraine. “Europe imports roughly 30% of its natural gas from Russia, and should any sort of economic sanctions come to fruition, Russia could decide to interrupt this supply. At this point, we are not expecting this to occur, but should significant sanctions be enacted, such actions would certainty hurt Europe’s already-fragile economic recovery and would act as a drag on European stocks”.

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