World hedges from stockpile chaos in oil, utilities and China

(Bloomberg) – Optimism may be rare for equity investors caught in the downdraft of volatile global markets, but pockets of refuge are emerging.

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From banks benefiting from interest rate hikes to stocks offering high dividend yields and cheap valuations, portfolio managers and strategists are finding areas of resilience. Those who are prepared to endure high volatility are betting on an eventual reopening of China.

The search for relative safe havens comes as riskier assets have been rattled by worries about soaring interest rates, inflation and slowing economic growth. The speculative fervor that drove meme stocks, blank check companies and cryptocurrencies has faded. Down 17% from its all-time high six months ago, the MSCI All Country World Index is approaching a bear market.

“Investors are caught between fears that earnings and valuations will be under pressure in the near term due to these headwinds, but also realize that equity valuations have fallen to levels that have become attractive to long-term investors. “, said David Sekera, director of the American market. strategist at Morningstar.

Dividend Champions

As companies navigate a world of rising borrowing costs and rising input prices, stocks offering income to investors via higher dividend yields are rewarded by the market. The MSCI World High Dividend Yield gauge, which is expected to offer a 3.8% return over the next 12 months, has outperformed its broader counterpart by more than 10 percentage points this year.

“The short-duration nature of high-yield stocks should also provide protection against higher interest rates,” Goldman Sachs Group Inc. strategists led by Timothy Moe wrote in an Asia-focused note on Wednesday.

Value names

While value stocks have outperformed their growth counterparts amid the tech rout, sectors such as materials and financials still offer room for improvement as earnings are expected to improve in a high inflation environment. and rising rates, strategists say. Earnings forecasts for the S&P Pure Value Index rose at a time when the outlook for growth peers is rapidly deteriorating, according to Bloomberg Intelligence.

Oil and gas stocks provide a natural hedge against inflation – particularly energy inflation – and have largely outperformed broader indices through 2021 and so far into 2022. The S&P 500 Energy Index rose by 45% so far this year, outperforming the broader S&P 500, which is down 16%.

Energy also topped the list of best performing global stocks in the MSCI World Index this year. Occidental Petroleum Corp., which focuses on Texas, leads the way after rising 121% so far this year.

Even after that run, Wells Fargo analysts Nitin Kumar and Joseph McKay wrote that “the outlook for the industry remains strong” and that “the global market remains structurally undersupplied” in oil and gas, in part due of the Russian invasion of Ukraine, creating tension in the supply of raw materials.

“Energy, even though the consensus is long, still makes sense” as an overweight investment class, JP Morgan analysts wrote in a research note after US inflation data showed on Wednesday. a larger than expected increase in consumer prices to 8.3%.

For energy stocks, “the fact that oil prices have stopped rising makes the sector less attractive than before, but it is still a sector that can extract a good part of the margins compared to others,” said Andrea Cicione. , head of research at TS Lombard.

Allocation to companies with stable earnings growth and sufficient pricing power “makes sense given the support in commodity prices,” said Marcella Chow, global market strategist at JPMorgan Asset Management.

China, Southeast Asia

China may currently seem like a contrarian bet, but Credit Suisse Group AG and Invesco Ltd. are among those pointing to an imminent rebound once lockdowns ease in major cities like Shanghai and Beijing.

While mired in a bear market, China’s benchmark CSI 300 index gained 2% last week, led by industrial stocks, posting its biggest weekly outperformance against global peers since 2020.

READ: Chinese stocks poised for recovery from lockdowns, says Credit Suisse

Elsewhere in Asia, the reopening of Southeast Asian economies also appears to offer opportunities, particularly in energy and financial stocks, the latter of which hold a nearly 40% weighting in the region’s MSCI benchmark.

“High-quality Asian banks with strong deposit allowances look relatively well positioned,” such as Bank Central Asia Tbk in Indonesia, said Ross Cameron, a Tokyo-based fund manager at Northcape Capital Ltd.

READ: Chinese stocks stand out as rare winners in global equities rout

Utilities, Japan

Defensive stocks – whose earnings are less dependent on economic cycles – also seem to offer some comfort. In Europe, the Stoxx 600 Optimized Defensives index was virtually stable over the year, compared to a 15.3% drop in the equivalent cyclical index.

Investors should remain “relatively constructive” on sectors such as U.S. healthcare and European utilities and telecoms, wrote Morgan Stanley strategists led by Mike Wilson in a mid-term outlook report. year.

Overall, Morgan Stanley prefers Japanese equities to US equities due to different monetary policy environments, lower valuations and moderate investor positioning.

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