Lebanese Ministry of Information
Investors have piled into defensive sectors, which generate higher dividends and have steady revenue streams, for the first time in two years, viewing them as the safest bet as global growth slows and trade tensions rise, data shows.
Globally, utilities stocks have pulled in $4.5 billion this year while consumer goods stocks have drawn in $3.2 billion, according to EPFR data. This breaks a two-year exodus from those sectors and is the latest sign of how uneasy investors are with stocks at record-high levels in a worsening economic climate.
The inflows accelerated at the start of May, when hopes of a truce in a trade war between the U.S. and China were dashed.
The strategy has paid off.
Unusually, focusing on the parts of the stock market considered safer not only protected investors from the worst of the sell-off late last year, but also helped them outperform during the first-quarter rally of 2019.
High-dividend and “low volatility” stocks, which tend to move less sharply than the average stock, have beaten market benchmarks. That underscores how “defensive”, not to mention hated, this year’s rally has been.
“You have your equity market that’s up 16% (year-to-date) but low volatility is beating it. You certainly don’t expect that in any other bull market,” said Nick Alonso, director of multi-asset at PanAgora Asset Management in Boston.
“Defensive assets did well in Q4, they protected on the downside and they also picked up that upside in Q1,” he added.
The S&P 500 is up a whopping 16.7% this year, soaring to a record high last week, but an index tracking just the “low volatility” stocks in the S&P 500 is beating that, up 17.4% year-to-date. Low volatility also outperformed in 2018.
“The return to minimum variance (low volatility) and traditional defensive strategies has been somewhat out of the ordinary,” said Panagora’s Alonso.
The interest from prospective clients in Panagora’s defensive equity strategies fund has more than doubled from the same period last year, he added.
BEARS AT RECORD HIGHS
The extent of investor mistrust toward the stock market’s relentless rise is apparent in surveys such as Bank of America Merrill Lynch.
Just as U.S. stock markets were hitting record highs, fund managers in the bank’s June survey reported their positioning was the most bearish it’s been since early 2009.
The respondents also said they increased their cash buffers to 5.6% from 4.6% as they ramped up protections against a market slide.
A dramatic U-turn by global central banks combined with an escalating trade conflict have made investors uneasy about the economy and uncertain about where markets go next, with all eyes on a critical meeting between U.S. President Donald Trump and Chinese premier Xi Jinping over the weekend.
“There isn’t much conviction out there, and it would be surprising if there were,” said Kevin Gardiner, global investment strategist at Rothschild & Co.
“It’s not remarkable that we are seeing the market-beaters of late perhaps beginning to break down a little,” he added.
Global stock markets have had their best first-half returns since 1997 and yet the risks to the rally are clear.
“The bull in the china shop is the political element, the trade war: there’s a chance of a rapid reversal,” said Guillaume Lasserre, chief investment officer at Lyxor Asset Management.
Lasserre has an underweight position on banks and industrials, and is overweight pharmaceutical stocks.
“We are defensively positioned, always for the same reason. We’re very confident about the ability of the market to perform long-term, but there is a lack of clarity in the shorter term.”
Investors are also seeking to lock in returns by backing income funds which promise higher payouts.
European investors have been pulling money from U.S. equity funds even as they plough billions into U.S. equity income funds.
David Holohan, head of equity strategy at Mediolanum Asset Management in Dublin, is another investor shifting to more defensive positioning, unconvinced central bank support will help sustain markets.
“We think monetary policy easing is one last hurrah and once that’s played out, if it hasn’t already, investors will look at fundamentals and see earnings estimates have been deteriorating for several months now, and that disconnect shouldn’t play out much longer before equities give in,” he said.
Reuters
