Seeking Domestic Dividend Stocks Amidst Prolonged Trade Uncertainty

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Seeking Domestic Dividend Stocks Amidst Prolonged Trade Uncertainty

QS RESEARCH GROUP

AUGUST 21, 2019

On January 22, 2018, President Donald Trump implemented steep tariffs on foreign washing machines and solar energy cells and panels, marking the beginning of a “trade war” between the US and China. While the implementation of new tariffs has been delayed, it is clear that the persistent and prolonged trade uncertainty is having an impact on both equity markets and growth prospects of the global economy. The potential for higher market volatility and softer economic growth (expected and realized) increases as the trade war rhetoric continues on. In fact, central banks in several developed markets have started to brace for softer economic growth by pivoting to a more accommodative monetary policy, pushing interest rates lower.

Since the onset of the trade war, the S&P 500 Index has returned 4.97%[1] despite reaching a historical market high on July 26, 2019. Prior to that, since President Trump’s inauguration to the last stock session before the tariff war started, the S&P 500 Index was up 26.21%.[2] However, not all sectors were affected equally by recent developments. The impact of trade wars has been particularly pronounced on multi-national, cyclically oriented stocks, especially those with exposure to China. As a result, and bolstered by yet lower interest rates, dividend paying stocks such as Utilities and Real Estate have outpaced Information Technology and Consumer Discretionary stocks.  

US EQUITIES PRE-TRADE WAR AND ONGOING TRADE WAR RETURNS BY SECTOR

Source: Bloomberg. Pre-Trade War period is January 20, 2017 through January 21, 2018. Ongoing Trade War period is January 22, 2018 through August 12, 2019.

Sectors such as Information Technology and Materials remain far more exposed to the ongoing trade tensions, with the US making up less than 45% of their geographic revenue and China making up 15% and 8% of their revenue, respectively. In contrast, Utilities and Real Estate have close to 90% of their geographic revenue exposure to the US and less than 1% revenue exposure from China.

GEOGRAPHIC REVENUE EXPOSURE BY SECTOR

*Includes all countries excluding China and the USA. Based on the MSCI USA Index as of June 30, 2019. Sectors based on GICS classification. Source: MSCI.

US equities broadly remain quite vulnerable to the ongoing tariff dispute and global uncertainty at large. Currently the five largest stocks make up over 15% of the S&P 500 Index. On average, these companies generate less than 50% of their revenue domestically.

TOP 5 S&P 500 SECURITY GEOGRAPHIC REVENUE EXPOSURE

Source: MSCI. *Includes all countries excluding China and the USA. Based on the MSCI USA Index as of June 30, 2019. Sectors based on GICS classification.

The escalating market volatility, up nearly 50% since the onset of the trade war, as measured by the CBOE Volatility Index (VIX), coupled with the potentially lengthy extension of a trade war does not bode well for cyclical equities. In contrast, the current environment seems to be more suited for sustainable dividend stocks in defensive sectors, with lower overall beta and less vulnerability to drawdowns. Additionally, as increased risks are associated with every asset class, it is important to maintain and/or add to alternative allocations such as Equity Market Neutral. Maintaining exposure to an uncorrelated source of returns, distinct from traditional stocks and bonds, becomes more and more crucial against this backdrop.

[1] January 22, 2018 through August 12, 2019
[2] January 20, 2017 through January 21, 2018

This material is intended for informational purposes only and it is not intended that it be relied on to make any investment decision. It was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. It does not constitute investment advice or a recommendation or an offer or solicitation and is not the basis for any contract to purchase or sell any security or other instrument, or QS Investors, LLC to enter into or arrange any type of transaction as a consequence of any information contained herein. QS Investors, LLC does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this document. Except insofar as liability under any statute cannot be excluded, no member of QS Investors, LLC, the Issuer or any officer, employee or associate of them accepts any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage whether direct, indirect, consequential or otherwise suffered by the recipient of this document or any other person. The views expressed in this document constitute QS Investors’ judgment at the time of issue and are subject to change. The value of shares/units and their derived income may fall as well as rise. Past performance or any prediction or forecast is not indicative of future results. This document is only for professional investors. Investments are subject to risks, including possible loss of principal amount invested.

QSCR-18870 (August 2019)

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