LIVE MARKETS-Rising volatility reinforces case for quality US equities, Wells Fargo says

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RISING VOLATILITY REINFORCES CASE FOR QUALITY US EQUITIES, WELLS FARGO SAYS

Stock market volatility has recently been on the rise, with measures such as the Cboe Volatility Index .VIX moving markedly higher as investors digest developments regarding the war in Iran and oil-related uncertainty.

"Higher volatility has historically correlated with a greater disparity of analyst opinions, reflected by a widening spread between the most optimistic and most conservative price targets for companies in the S&P 500 index," writes Alex Sagal, investment strategy analyst at the Wells Fargo Investment Institute (WFII).

He adds, "We view U.S. Large Cap Equities outperformance as an indication of investor preference for higher-quality areas of the market."

Indeed, U.S. large caps generally have better aggregate balance-sheet strength, free-cash-flow margins, and pricing power vs. other equity classes.

According to Sagal, emerging market stocks tend to be heavy energy importers, and developed markets, such as Europe and Japan, rely on the rest of the world for their natural gas and crude oil. This reinforces WFII's preference for quality, especially during this period of uncertainty.

Meanwhile, at the sector level, higher oil and transportation costs have weighed on sectors such as Staples and Materials, while benefitting energy producers.

Additionally, he says that Tech has remained resilient because of its secular growth and quality characteristics.

"As these crosscurrents persist, we expect volatility and dispersion to remain elevated, and we favor disciplined exposure to high-quality large-cap equities," writes Sagal.

(Terence Gabriel)

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