On the Minds of Investors
Q: How should investors position themselves in the current market environment?
Equity investors are at a crossroad. 2019’s market rally has been driven by valuation re-rating as a result of more supportive policy stance by central banks and reduced risk of a full-scale trade war. Now, investors are waiting for economic data to improve and corporate earnings reports to give us more clues on the status of revenue growth and profit margins. We are still at an early stage of 1Q earnings season in the U.S. and the results so far are respectable. Economic data from China are also showing early signs of stabilization. However, a turn in the economic outlook and markets that are once again moving higher has prompted worries that the Chinese authorities will restrict further stimulus. Meanwhile, Asia’s trade cycle is yet to improve. The preliminary South Korean export data for the first 20 days of April, a canary in the coal mine for broader Asian trade, contracted by 8% versus last year. Recent Taiwan trade figures were also weaker than expected.
There are two options for investors who wish to safeguard themselves amid an uncertain market environment. First, high dividend stocks offer investors return via income, even as capital gains in coming months are unlikely to match the stellar performance in the first quarter. Since global central banks are reinforcing the low cash return environment, yield seeking behavior is picking up. In Asia, markets such as Australia, Indonesia, Malaysia, Taiwan and Thailand offer dividend yields of 3% or higher. Beyond Asia, Europe and the UK also provide investors plenty of high dividend opportunities.
The second option is to consider different styles in equities. Growth stocks have significantly outperformed value stocks in recent years given the uninterrupted U.S. growth cycle. The technology sector was a significant contributor in this run. As we proceed deeper into the economic late cycle, value style, including sectors such as financials, materials and selected industrials, could potentially outperform. Their relatively attractive value also reflects a more challenging economic environment is partially priced in. Historically, value style outperformed growth style in more challenging economic times and shows that value stocks have offered a partial hedge against market risks. Based on the returns of value and growth versions of MSCI World index since 1974, value has outperformed growth by an average of 0.5 percentage point during months when the broader market was down (total return basis).
EXHIBIT 1: Growth vs. value relative performance and rates
MSCI World value / growth performance vs. u.S. 10-year treasury yield
As we wait for further direction in both global economic performance and corporate earnings, investors should stay invested in equities. We expect the global economy to only improve moderately in 2H 2019 and central banks more likely to stay put than injecting more stimulus. There are ways to adjust equity allocation to help diversify return, by seeking dividend income, and manage volatility, by tilting towards value style equities.