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A key trend: Why relative value is trumping risk aversion

Russ Koesterich, CFA of BlackRock

A key trend: Why relative value is trumping risk aversion (Part 1 of 5)

Despite recent rising geopolitical tensions, stocks haven’t completely followed the typical “risk-off” script and a number of high-risk segments have performed relatively well. The simple reason: Investors have found a new-found interest in relative value. Russ explains and shares which market segments potentially offer this value.

The stock market has had a less-than-positive tone the last three weeks thanks to rising geopolitical tensions. However, trading has not been all about risk aversion or getting “defensive.” In other words, stocks haven’t completely followed the typical “risk-off” script.

Market Realist – The U.S. markets stayed relatively flat as stocks fell throughout last week. The week ended with a rally on Friday. The rally helped markets register nominal gains. The S&P 500 (SPY)(IVV) increased 0.19% and ended the week at 1,931. The Dow Jones Industrial Average (DIA) also rose, by 0.34%, to reach 16,554. The tech-heavy NASDAQ increased 0.12% to end up at 4,370.

With the increasing geopolitical risk affecting markets, Treasury prices (TLT) rose. Treasuries are often considered safe haven assets. Their popularity has increased due to the worsening conflict between Ukraine and Russia, U.S. sanctioning airstrikes in Iraq, and ongoing violence in Gaza. The yield on the ten-year Treasury (IEF) dropped from 2.50% to 2.41% as prices went up.

The ten-year Treasury note (IEF) yield rose in the beginning of this week. It was 2.422% as of August 11, 2014. Analysts are attributing this rise to the easing in the Gaza conflict as Hamas agreed to a three-day ceasefire in the troubled area. The 30-year bond (TLT) yield rose to 3.236% on the same day.

Though the tone is definitely not positive, analysts haven’t noticed broad wide-scale sell-offs. We can attribute this to the positive earnings reports flooding in from U.S. corporates. More than 77% of companies have beat analyst expectations so far. According to BlackRock, corporates have shown strong revenue growth of 4.4%.

Market Realist – The graph above shows how the majority of sectors have given earnings exceeding analyst estimates.

In fact, markets started the week on a positive note as tech companies rose on account of upbeat earnings from Priceline (PCLN) in the second quarter. Chiquita Brands (CQB) climbed 31% on a $611 million buyout offer from Safra Group and the Brazilian agribusiness and juice company Cutrale Group. Kinder Morgan (KMP) rose 10%, owing to its announcement of a consolidation of a group of oil and gas companies that it controls.

Read on to the next part of this series to see why investors aren’t being defensive but are searching for value.

Continue to Part 2

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