Low volatility or ‘low vol’ is financespeak for the safest equity market sectors, those with the lowest standard deviation, higher dividend yields, and are least affected by moves in the broader market. Recently, they’ve been crushed.
Ian de Verteuil is the head of portfolio strategy, quantitative and technical research at CIBC World Markets. In a research report this week, he discussed the surprising damage endured by stock prices in normally sedate low- vol sectors. Overall, they lost 8.9 per cent for the eight-day trading period ended Oct. 6, the worst performance of the past five years.
The list of domestic low-vol stocks is dominated by utilities, communications, real estate, and consumer staples companies. For the 30 days ended with Oct. 6, these sectors lost 11.1 per cent, 6.1 per cent, 14.4 per cent and 5.7 per cent, respectively.
For Mr. de Verteuil, the reasons for the underperformance of these usually defensive market sectors are not immediately clear. Low-vol stocks are overwhelmingly yield-bearing so higher bond yields are the obvious culprit for the sell-off at first glance. As yields climb, risk-free bonds become a more attractive source of income relative to the higher uncertainty of equity dividends.
CIBC, however, is skeptical regarding bond yields as the reason for low-vol stocks weakness. Mr. de Verteuil notes that bond yields were relatively stable for the worst period of underperformance.
That said, low volatility stocks have historically underperformed during inflationary periods. Mr. de Verteuil wrote, “With inflation remaining stubbornly high, there is a convincing argument that the best days of low-vol strategies are behind them.”
The strategist notes, however, that previous inflationary periods featured improving economic conditions when investors were buying growth-sensitive cyclical companies and avoiding defensive sectors. With growth forecasts being cut worldwide, CIBC expects that low-vol stocks will remain an attractive investment option in the months ahead.
Mr. de Verteuil remains a believer in defensive, low volatility market sectors for long-term investors. The strategy helps keep investors away from high risk stocks and has historically provided strong risk-adjusted returns (as measured by Sharpe Ratio) along with dividend income.
Rapid, significant sell-offs are exceedingly rare for low-vol stocks and a repeat of the September weakness is unlikely. This is not to say the coast is clear, however, as further bond yield increases would limit upside.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
General Electric Co. (GE-N) This struggling U.S. blue chip has undergone a massive revamping over the past dozen years, and it’s not a stock The Contra Guys are particularly thankful they’ve held. But with changes afoot at the company - and a book value that is slightly less than half the trading price - they believe that with a bit of luck, a four bagger could be coming their way.
Keyera Corp. (KEY-T) This midstream energy company has seen its share price under pressure along with the weakness in the overall markets. But analysts see potential for the stock to rise 30 per cent over the next 12 months; meanwhile, investors can accumulate an attractive dividend that appears sustainable and may grow - it currently yields 7 per cent. Jennifer Dowty explains why this is a stock that income investors may want to monitor.
Headwater Exploration Inc. (HWX-T) Month-to-date, the share price of this energy company is up a staggering 26 per cent, making it the second best performing stock out in the S&P/TSX energy index and outpacing the 12 per cent move higher in the price of oil. As Jennifer Dowty tells us, Headwater stands out from its industry peers due to its proven management team, assets with strong economics and its pristine balance sheet. Analysts are expecting a further 50 per cent surge in its stock price over the next 12 months.
The Rundown
Six-per-cent dividend yields from blue chip stocks are there for the taking
With stocks falling, it’s a great time to be an income-focused dividend investor. As stocks dropped yet again this week, Rob Carrick took a look at dividend yields for the big blue chips in the S&P/TSX 60 index. Yields of 6 per cent and higher were available from eight companies, each with a good record of dividend growth over the past five years.
Also see:
Number Cruncher: Ten solid TSX dividend growth stocks yielding more than 3.5 per cent
Number Cruncher: Dividend-payers with top brands set to thrive in inflationary times
Saga of Wall Street’s pandemic darlings ends with tears
Think about something novel you started doing two-and-a-half years ago to make life easier during the COVID-19 lockdown and chances are today there is a related story about a stock-market casualty. Add investor worries about soaring inflation and an economic slowdown that tipped Wall Street into a bear market this year, and you will find a bleak picture for the companies that became hugely popular during the pandemic. as Sinead Carew of Reuters reports.
In the stock market, it’s like the pandemic never happened
In the stock market, it’s February, 2020, all over again. The colossal slump that has seized financial markets around the world in recent months has now reduced the S&P/TSX Composite Index to roughly the same level it was just prior to the COVID-19 crisis. As Tim Shufelt tell us, the experience of such a powerful and compressed boom-and-bust cycle will leave a mark on those who participated in it.
Also see:
Canada energy IPOs tough sell even as institutions return to sector
Five ways the Fed could calm frazzled markets
Earnings estimates for Wall Street fall sharply
The outlook for jobs and spending may be chief among concerns for investors heading into third-quarter U.S. earnings as expectations increase that the Federal Reserve will need to keep an aggressive approach to hiking interest rates. Estimates for the earnings period have been falling, and analysts now expect S&P 500 companies’ earnings to have grown just 4.1% year over year in the quarter compared with an estimated increase of 11.1% at the start of July, according to IBES data from Refinitiv. Caroline Valetkevitch reports from New York.
Others (for subscribers)
The highest-yielding stocks on the TSX, plus risk data
Friday’s analyst upgrades and downgrades
Thursday’s analyst upgrades and downgrades
Thursday’s Insider Report: Board member invests nearly $600,000 in this trust yielding 9%
Globe Advisor
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What’s up in the days ahead
Are we on the brink of another financial crisis? Ian McGugan will share his insight. And we find out what Mackenzie Investments money manager Katherine Owen is up to.
Calm or calamity? World market themes for the week ahead
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Compiled by Globe Investor Staff