Beware falling daggers: Black Rock

On a day like today – down -5.2% at the open, yes -5.2% (it’s not a typo) contrarian investors would typically sniff out quality stocks dragged down by the broader market, knowing that when the dust finally settles former losses will be recovered.

But given that our market typically takes its cue from what happens in US markets, all eyes should remain on Wall Street as a talisman for when to pick-off local stocks looking decidedly oversold.

Cool your jets

Given that buying falling daggers makes it doubly hard to make up lost ground, BlackRock Investment Institute has advised investors to think twice before buying the dip in US shares, and by default that advice is equally valid here.

Without putting too fine a point in it, the overarching sentiment is Not Yet!

Despite US stocks incurring the biggest year-to-date losses since at least the 1960s, BlackRock suggests passing on the urge to mop-up what appears to be a market bleeding value.

What the market giveth...

Underpinning BlackRock’s call not to buy are valuations which despite appearing to be cheaper are being offset by rising interest rates.

Then there’s a weaker earnings outlook, plus a higher path of policy rates which BlackRock reminds investors justifies lower equity prices.

"We also see a risk the Fed will lift rates too high – or that markets believe it will… plus, margin pressures are a risk to earnings,” BlackRock noted.

"That’s why we’re neutral on stocks on a six-to-12-month horizon."

What appears to be spooking US markets right now is the possibility of a 75-basis-point rate increase by the Fed later this week.

Veins of opportunity

While consumer discretionary and housing-related stocks are likely to struggle within the current environment, Macquarie recently reminded investors that some companies are better placed to benefit from a rising interest rate environment, these include:

• Computershare Ltd (ASX: CPU): An international share services group which typically enjoys an income boost when rates are rising.

• Transurban Group (ASX: TCL): The toll road operator has contract-based pricing power when it comes to setting tolls.

• CSL (ASX: CSL) and DEXUS Property Group (ASX: DXS): Macquarie sees these two stocks as covid-recovery plays.

• Amcor CDI (ASX: AMC): Is expected to benefit from strong defensive earnings and reasonable valuation.

Grim and ‘bear it’

Today’s falls on the ASX – now down more than -13% from a recent peak in late April - follows US stocks plunging into a bear market and global bonds plunged on Monday as inflation and recession fears rattled investors.

Echoing similar sentiment to BlackRock, Saxo Capital Markets Australia's market strategist Jessica Amir notes a distinct air of caution on the expectation that the inflation picture is going to worsen.

“We remain really defensive here, expecting sharper pull backs in equities as market shocks will likely continue.”

Amir notes that strengthening economic conditions, along with unemployment data likely to hit another monthly record low, means the RBA has the ammo to hike rates more than expected.

Bonds yields

In response to the share markets gymnastics, Aussie benchmark 10-year yields jumped as much as 33 basis points to 4.01% and marked the biggest one-day jump since 2008.

Meantime, rate sensitive three-year yields jumped as much as 42 basis points to 3.54%, the highest since April 2012.