Investors should position themselves for a more defensive approach to equity investing in anticipation of turbulence next year.
Léon Cornelissen, chief economist at Robeco, said macro events such as Brexit, Italy’s debt crisis, US-China trade tensions and the likelihood of the US economy overheating might affect the equity markets.
Meanwhile, central banks are also expected to – at some point – slam on the brakes to slow down growth, which would in turn affect the equity markets.
There are several reasons why it might be wise for investors to position themselves for a more defensive approach to equity investing next year, Robeco said in its annual outlook for 2019.
For one, economic growth is at a turning point where acceleration will give way to stabilization and eventually, to deceleration.
Citywire A-rated Jeroen Blokland said equity prices will probably move higher before things really start to heat up and it makes sense to start to focus on equities with a more defensive profile.
‘In addition to low-risk equities, we think equities with a low valuation, high quality and/or high dividend fall into this category,’ Blokland, who manages multi-asset funds at Robeco, said.
Although US equities tend to qualify as being defensive, their attractiveness has diminished. After nearly a decade of above-average returns, US equities are overvalued compared to equities in other regions.
Meanwhile, an environment of disappointing growth is usually bad news for growth stocks and goes some way to explaining why defensive stocks may gain further ground.
Growth stocks typically deliver the expected profits later in the game than more defensive stocks, which already generate a continuous and usually steadier cash flow.
The fact that future cash flows have a longer duration means that growth stocks are more sensitive to an environment of rising interest rates.