Fearing stock market rout, investors seek shelter in dependable dividends
2 July, 2019, 4:00 am
LONDON (Reuters) – Defensive equity strategies focused on high payouts and steady earnings have gained in popularity this year as investors flock to safety, worried the biggest stock market rally in decades is about to come crashing down.
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.