No doubt about it, Europe will continue to challenge investor resolve in the weeks ahead. Global markets are still in correction phase and while cyclical stocks are clearly discounted, defensives are doing what they are supposed to do in current markets.
There have been some recent positive tones with pro growth statements from France, the United States and China that all aim to address the austerity fatigue currently in Europe. Importantly, strong support for Greece to remain in the euro was reinforced, combined with statements of supportive policy initiatives for broader Europe – whatever it takes. And there are “known knowns”; that is, markets have a clear time line and the Greek elections are on 17 June.
But it is also very clear that investor concern will remain elevated. Market valuations are cheap on so many measures, but this is another period whereby fundamentals are being dismissed. Therefore defensive stocks will continue to do what they should in times of elevated market volatility.
The defensive asset classes – Cash and Fixed Income – are part of the average investor profile. The problem is that cash returns are heading lower in 2011 versus 2012. Fixed income acts as the true hedge for equities; the main Composite Bond Index is now up 12.7% compared to a year ago.
With regard to equities, cyclicals remain cheap. However, investor demand is cautious and therefore defensive income-focused stocks remain an ongoing investment theme.
Quality dividend-paying companies tend to be combined with exposure to defensive cashflow-style businesses; Telco’s, Gaming, Utilities, Infrastructure and some financials offer some attractive, broadly defensive yields for investors.
To recap, our preferred equity income theme (see Table 1 below) highlights some of our equity income preferences. The target for this style of investment is to maximise income (including franking credits) from investments that are reasonable. All dividends are ultimately a promise, not a legal obligation like a coupon, therefore quality sectors and stocks need to be retained in your portfolio in times of investor caution.
Table 1: Review of Core Australian Equity Income Portfolio
AMP, CBA, CCL, DUE, NAB, TAH, TLS, TTS, WBC, WES, WRT
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