A volatile year for financial markets got even dicier on Tuesday, as political turmoil in Italy sent investors rushing into the safety of US Treasurys and away from stocks.
Even before Italy created more uncertainty, investors were reckoning with how the global growth over the past two years was fading, and with central banks raising interest rates. And some of the safe havens investors flocked to in times of uncertainty were not working like they used to, according to Macquarie’s Viktor Shvets and Perry Yeung.
“It is not even clear where should one hide, as traditionally safe places (such as consumer staples) do not seem to be able to outperform their respective indices even at times of greater stress while higher priced technology sub-sectors do not sustain the type of erosion that one would normally expect at a time of rising cost of capital,” they said in a client note on Tuesday.
For example, US Consumer Staples, a sector that’s defensive because its companies make essential products, has tumbled 13% this year. Meanwhile the S&P 500’s Information Technology sector, which is more vulnerable to economic swings, has gained 10.5%.
The implication, according to Macquarie, is that traditional sector rotation during periods of volatility is no longer a feasible option. The analysts note the role that technology has played in disrupting sectors like consumer staples, which is fending off competition from Amazon, and media, which is losing advertising dollars to Google and Facebook.
“Certain sectors (such as consumer staples or media) are suffering from profound disintermediation while investors have limited confidence on durability of cyclicality and hence, are reluctant to re-price some of the cyclical sectors,” they said. “This leaves companies that seem to be delivering growth trading at a significant premium.”
Meanwhile, stocks are increasingly moving in lockstep, making it harder for stock pickers to single out breakaway opportunities.
“As discussed in our prior notes, we do not believe that investors would ever return to what is regarded as a conventional return dispersion; rather it is far more likely that extreme monetary uncertainty would be replaced by a mix of monetary, fiscal and political uncertainties, which are just as difficult to predict as were QEs and their impact,” Shvets and Yeung said.
“Hence, we do not believe that return of wider dispersions and conventional stock-picking markets is likely.”
The analysts included some recommendations for global investors on what to do if their forecasts for greater uncertainties hold.
“In a world dominated by meaningless noise, automated trading, hyper active public sectors and as a result severely compressed and distorted business and capital market cycles, we continue to prefer to avoid short-term trading opportunities (unless they are exceptionally deeply discounted) and stick with secular strengths, domestic scale and low external vulnerabilities while avoiding terms of trade exposures,” they said.
They advise sticking with economies that can demonstrate secular strengths. Korea and Taiwan, for example, increasingly trade products that are relatively price-inelastic.
In addition, large-scale and liquid domestic markets like China and India, which can change the rules to meet their economic objectives, unlike countries like Malaysia and Taiwan that can’t pull the same muscle.
The table below shows stocks they believe can grow returns on equity without taking on excessive debt or eroding their margins.
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