Go global and use energy stocks to hedge against rising volatility says Blackrock

11th September 2013

Global diversification and exposure to energy stocks may help insulate the portfolios against rising market volatility says Russ Koesterich, BlackRock’s chief investment strategist.

In a note issued this week, Koesterich identifies three main drivers to stock and bond market volatility –  uncertainty surrounding the path of economic growth, uncertainty over Federal Reserve policy and concern over growing geopolitical instability in the Middle East.

He says this come despite an improving economic context but this may be because the signals are still mixed.

The note says: “While economic data continues to be mixed, we have been seeing signs that both the US and global economy are stabilising. In the United States, manufacturing data in particular has been stronger. Two key measures-the ISM Manufacturing and ISM Services indices-both posted sharp improvements in August. Outside of the United States, data from most regions (with the exception of a few emerging markets, notably India) also shows that the global economy is continuing to heal.

“One key area remains troubled: the jobs market. Last Friday’s labor market report for August was disappointing, with the data showing that 169,000 new jobs were created, less than the forecasted 180,000. The pace of jobs growth for July was also revised downward. Year to date, an average of 180,000 new jobs per month have been added, which is actually slightly less than the pace seen in 2012.”

This also contributes to confusion around tapering.

“There has been widespread speculation that the central bank will soon begin to scale back on its asset-purchase program (a process known as “tapering”), but given the uneven nature of the economic recovery exactly when this will happen and to what degree remains unclear. Adding to the uncertainty, it is still unclear who is going to head the Fed in 2014 after current Federal Reserve Chairman Ben Bernanke’s term expires”, the note adds.

Koesterich says that rising Middle East tensions not just in Syria but also in Egypt has been a significant reduction in oil supplies and exports.

“This has had the predictable effect of pushing up oil prices, which are now 25% above their April lows. Should the region’s violence escalate and the instability spread, higher energy prices would likely impede the global recovery.”

He suggests that investors are looking for safe havens. “Where can investors look to find opportunities and to insulate their portfolios from volatility? One idea we have been advocating for some time is to seek out adequate levels of international diversification”.

(Editor’s note: this is in comparison to what Koesterich sees as his home market, the US, but we think it applies to UK investment too. For example, it is also the view of Psigma’s Tom Becket who takes a more UK centric perspective.)

“In addition, we would suggest adopting overweight positions to the energy sector. Earnings trends appear attractive for this area of the market, and energy companies can potentially act as a hedge against Middle-East induced market volatility,” he says.

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