With the equities bull market facing yet another speculative bubble bust, the sell-off in equities yesterday might turn out to be a gift in disguise over the long term.
The market demonstrated its resilience earlier this year when it emerged unscathed from the meme stock frenzy. In January, a group of social media-obsessed retail investors created massive short squeezes in a few names with high short interest, including GameStop. The overall market experienced some turbulence during the episode, but once the dust settled, the S&P500 rallied to a new record high as a result of the economic reopening.
“I am reasonably certain that stock market investors do not react to changes in digital assets. According to John Davi, chief investment officer and founder of Astoria Portfolio Advisors, it is the other way around.
Despite recent weakness, the S&P500 and the Dow Jones Industrial Average are both up about 10% this year.
With a 2.8 percent year-to-date gain, the tech-heavy Nasdaq Composite has been the relative underperformer as growth stocks have come under pressure amid inflationary fears. A sustained increase in price pressures could destabilize the Federal Reserve’s accommodative policies, harming technology companies that have relied on low borrowing costs for years to achieve superior growth.
This week’s crypto-induced volatility occurred as investors dumped high-flying tech and pandemic winners in favor of shares more closely linked to a successful economic recovery.
“A rotation is taking place in which investors are selling unprofitable technology and re-opening stocks while moving up the liquidity and quality spectrum,” Davi explained. “Given the massive valuation and outperformance in these cohorts last year, this makes sense to us.”
As the volatility in the market increases, as well as inflation forecasts, investors want to invest in equities that offer increasing dividends.
This year, his firm’s Quality Dividend Index Fund has gained more than 13%. Cash flow and profit margins relative to peers are two financial health metrics that Hummer employs.
Filtering for debt levels to find firms with room for more dividend hikes and manageable interest costs is one way to start a screen for financially healthy companies.
According to FactSet data, the stocks listed below have a dividend yield of 2% or higher and have increased their payouts at least four times in the last five years. The companies must also have a total debt-to-capital ratio of 60% or less, as well as a market capitalization of at least $20 billion.
The list is heavily weighted toward energy stocks and mid-sized financials. Rising interest rates tend to boost bank bottom lines, while rising gas prices can signal stronger cash flow for energy producers, making both sectors particularly appealing to investors concerned about inflation.
As economies around the world reopened following the pandemic, the price of oil has risen back above $60 per barrel this year, easing some concerns about the health of energy companies.
Valero and Canadian Natural Resources have the highest dividend yields on the list, at 5.1 percent and 4.0 percent, respectively. Each has a debt-to-capital ratio that is less than 50%.
Prudential and Citizen’s Financials, both insurers, have the highest yields on the list, at 4.2 percent and 3.2 percent, respectively. According to FactSet, the two have increased their dividends in each of the last five years.
Texas Instruments is the largest company on the list in terms of market capitalization, with a market cap of more than $160 billion. The stock has a dividend yield of more than 2% and is one of the top ten holdings in the FlexShares Quality Dividend Index Fund. Year to date, the chip maker’s stock has risen by more than 12%.
Sea Limited, which is listed on the New York Stock Exchange, is one of the new additions. The Singapore-based company operates e-commerce, mobile gaming, and digital banking operations throughout Southeast Asia.
Sea’s shares will be phased into the MSCI Singapore Index beginning in May. According to Morgan Stanley in a report this week, this could direct more money into the stock, which will support its share price.
CapitaLand, one of Asia’s largest real estate firms, and SembCorp Industries, an energy and urban development company, are the other two newcomers to the focus list. Both companies are traded on the Singapore Exchange.
According to Morgan Stanley, CapitaLand’s restructuring will increase its return on equity — a measure of profitability — whereas SembCorp’s renewable energy portfolio appears to be underappreciated by investors.
CapitaLand has announced its intention to split the company in two. The property development business will be taken private, while a revamped real estate investment management company will become a new listed entity on the Singapore Exchange.
United Overseas Bank, Singapore’s third-largest lender, and conglomerate Keppel Corp, which has businesses in property, infrastructure, data centers, and renewable energy, round out the list.
The following are Morgan Stanley’s price targets for the five stocks, as well as the implied upside:
Three stocks were removed from the Wall Street bank’s Singapore focus list:
City Developments is a real estate developer. Morgan Stanley said the stock’s performance would be hampered by fresh property curbs, which could come by end-2021 given that home prices in Singapore are rising.
According to Morgan Stanley, the industrial real estate investment trust Ascendas REIT continues to offer an attractive dividend yield of more than 5%. However, rising government bond yields may reduce the stock’s appeal, according to the bank.
Thai Beverage is a leading Asian beverage manufacturer. Morgan Stanley said a deterioration in the Covid-19 situation in the company’s key markets of Thailand and Vietnam would hit stock performance.