During this quarter, equity markets have been hammered for various reasons including the prospect of more rate increases, trade tensions, peak in corporate earnings growth and the prospect of economies slowing down.
We are at a point whereby the longest bull market in history is reaching an end and with the prospect of a global recession on the cards over the next year or so.
Another problem in the current context is that traditional assets (like Government Bonds and Gold), which generally act as a protection in turbulent times, have not had the desired effect to generate excess return.
This is very much highlighted this quarter – Since the end of September the S&P 500 has declined by 8%, whilst traditional assets like Govt bonds and Gold had since a relatively flat performance.
Diversification into these instruments would have of course decreased the massive harm done by the equity rout however not enough to generate positive returns.
What to do about it?
On this point, an important aspect to consider is also diversification into different sectors. If we dig deeper into the S&P 500 index, we can notice that out of 11 sectors, 8 sectors are negative whilst only 3 are in positive territory.
We know it may not be a surprise, but the Utilities sector has been the best performer during this particular market period that began in October (+3.3%).
The utilities sector basically is a category of stocks for utilities such as gas and power. The sector contains companies such as electric, gas and water firms, and integrated providers.
This sector is considered as a safe haven in turbulent times because the companies within it are mostly set in an oligopolistic structure and protected by regulators. This means that the industry in which they operate is dominated by a very small number of large sellers.
Furthermore, consumer demand will always be high for this industry as the goods/services they provide, like electricity, water, gas for heaters, etc are always needed by consumers (irrespective of what is happening in the macro economy).
Do we underperform over the longer term to obtain this short-term protection?
Although this sector does not look very trendy like Information Technology, Healthcare or Energy, and is sometimes overlooked by investors, it is important to mention that performance has been very stable even over the longer term when markets have done very well.
As we can see from the table below, the Utilities sector has been the best (in comparison with the broad sector) not just for this year, but for all periods expect for 10 years.
From the 20 year chart below we can also notice that for most part, the utilities sector has had less “downside capture” than the standard S&P 500 index.
What is clear here is that long term returns give evidence to the importance of the utilities sector: People and companies need those services in what is a critical industry protected by regulators. Utilities also reward investors with steady dividend payouts.
Would you like to know which investments we are considering in this sector? Click here to know more about our Investment Research Report.