Time to consider defensive equity strategies
Investors might need to consider repositioning their portfolios through diversification into defensively oriented stocks which are typically associated with sustainable dividend pays, according to Legg Mason’s subsidiary QS Investors.
After a relatively strong year which saw equity markets surpassing record high several times, the coming year might turn out to be more “turbulent, yet potentially profitable” as long as investors would prepare their equity allocations respectively.
The warning signs for investors that had recently emerged and could potentially spark more volatility included recurrent tensions in US-China relations, further uncertainty around Brexit, soft economic data and an inversion of the two and 10-year segment of the US yield curve in August which might herald lower equity market returns, given the latter stages of the protracted expansion, the firm said.
“While an inversion in the yield curve is typically associated with recession, it is key to note that historically, an inversion in the US yield curve has preceded a recession by an average of 14 months and in multiple cases the period between one (the inversion of the yield curve) and the other(recession) has been closer to two years,” the firm said.
Therefore, investors would need to embrace two conflicting objectives: how to maintain equity market participation while limiting vulnerability to a late-cycle correction or negative market shock for capital preservation.
“Defensively oriented stocks can lower overall portfolio volatility and dampen drawdowns while allowing for equity market participation,” QS Investors noted.
“Dividends typically become a larger and more stable component of total return in low return environments and lower volatility profiles may mitigate drawdowns during periods of market turbulence.
“Defensive equity income strategies may help investors prepare their equity allocations for a turbulent, yet potentially profitable 2020.”
The performance of Legg Mason QS Investors Global Equity since inception
AUTHOR
Oksana Patron
Recommended for you
Perpetual has released its Q2 fund flows showing a fall back into outflows after a positive Q1, as well as an update on its planned deal with KKR.
Magellan has announced a raft of executive changes including the departure of head of investments Gerald Stack after 18 years and a second appointment from Maple-Brown Abbott.
Morningstar research of seven active Australian asset managers has found they are expected to see client redemptions averaging 3.1 per cent of their FUM per annum through to FY29, with two forecast to lose more than 10 per cent.
Franklin Templeton is to get rid of its Martin Currie branding and fold them into the wider group under ClearBridge Investments and Franklin Equity Group.
