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Markets & Finance

Investors Cope With Geopolitical Strife

From Standard & Poor's Equity Research

Here are the notes from Standard & Poor's Investment Policy Committee meeting, held on Wednesdays.

Fundamental Outlook

Consistent with our July 12 downward adjustment in the yearend S&P 500 target, on July 13, S&P's Equity Strategy Group raised its recommended weighting for the S&P 500 Consumer Staples sector to overweight from marketweight, citing the sector's defensive attributes in light of increasing concerns regarding slowing economic and EPS growth.

In addition, we lowered our suggested exposure to the Information Technology sector to underweight from marketweight, due to weak estimated operating earnings growth for the S&P 500 IT sector. Information Technology sector earnings per shareS are projected to advance only 4% in 2006, vs. 12% EPS growth expected for the S&P 500. Despite low relative EPS growth, this cyclical sector's p-e on the estimated operating earnings for 2006 stands at a 30% premium to the S&P 500's p-e of 14.4.

Growing geopolitical strife is now foremost in investor's minds after the recent escalation of tensions in the Middle East, coupled with ongoing anxiety regarding North Korea's nuclear ambitions, after their missile tests on July 4, in our view. West Texas Intermediate crude oil hit $77 a barrel on July 14 as traders worried escalating Arab-Israeli fighting could spread, disrupting Middle East oil supplies.

S&P believes the strong correlation between rising geopolitical unrest and rising energy prices only exacerbates its impact on world stock markets, as high oil prices fan inflation fears and further limit visibility on second half global economic and earnings growth.

S&P's Asset Allocation

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