Investors have several reasons to boost their defensive positioning as fears of higher-for-longer interest rates, sticky inflation, geopolitical tensions and an upcoming U.S. election rattle markets, according to Nuveen, which has about $1.1 trillion in assets under management.
Financial markets have been fairly reactive to U.S. economic data, as strong numbers threaten to prompt the Federal Reserve to extend its restrictive monetary policy stance and ultimately result in a more severe recession, according to Saira Malik, chief investment officer at Nuveen. Such reactive behavior is likely to continue, she wrote in a Monday note.
Malik said her team recommends that investors stay invested, but adjust their allocation positions to reduce volatility and to capture potential returns from a recovering market, including by increasing their allocation to defense equities. “Such a posture would focus on high quality, cash flow generation and dividend growth,” Malik wrote.
It also may benefit investors to tilt their portfolios toward dividend growers and the global infrastructure sector, according to Malik.
“U.S. dividend growers are supported by positive fundamentals, sustainable growth potential, sound balance sheets and ample free cash flows, which together enhance their capital flexibility to return more cash to shareholders via increasing dividend payments,” Malik said. Such income could help investors lower the impact of inflation and elevated interest rates on their portfolios, Malik wrote.
Historically, dividend growing companies have also shown resilience during market turbulence, and in periods following Fed’s rate-hiking cycles, Malik noted.
Meanwhile, companies in the global infrastructure sector could benefit from steady demand of the services they provide, even during an economic slowdown. “This part of the equity market tends to be relatively well-insulated from higher debt costs (i.e., interest rates) and persistent inflation, thanks to inflation escalators built into underlying contracts,” according to Malik.
Comparing a 50/50 portfolio consisting of dividend growth and global infrastructure stocks to the broader global equity market, the former provides a dividend yield advantage of 3.5% compared with 2.3% of the latter, though they offer similar valuations, Malik wrote. The 50/50 blend has been less volatile over the past decade, according to the note.
U.S. stocks were trading mixed on Monday, with the Dow Jones Industrial Average
DJIA
down 0.3%. The S&P 500
SPX
up 0.2% and the Nasdaq Composite
COMP
0.7% higher, according to FactSet data.
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