Sheikh, who co-manages the global macro opportunities fund at JPMAM, suspects the trend of re-rating defensive dividend payers is in its infancy. However, as investors continue the hunt for sources of high quality income and total return, the time to re-price these equities is now, he said.
“The last few weeks have already seen meaningful re-pricing of credit and rates, as they have rallied to historically pricey levels, but we have yet to see a fully commensurate re-pricing in defensive dividend payers,” Sheikh said.
Sectors like healthcare, consumer staples, utilities and telecoms are areas Sheikh continues to like as sources of income that can add portfolio diversification. “These companies have a relative degree of pricing power in an inflationary environment and are therefore more likely to be able to grow their cash flow and distribute it back to shareholders,” Sheikh stated.
In particular, Sheikh said he has been adding to his global healthcare holdings in the weeks after the referendum. While he has held thwse types of stocks consistently, he said he has re-engaged over the last couple of months. “Many of the big FTSE healthcare names came under selling pressure after Brexit,” he said. “We felt that was a buying opportunity.”
By contrast, he said he is removing beta risk from the portfolio.
“We are avoiding energy, industrials and other cyclical sectors that were priced for what proved to be overly optimistic growth expectations,” he said. “With the fragility of the economic recovery further threatened by the uncertainty of the Brexit outcome, we’d expect to see investors continue to recalibrate their risk sentiment.”
Sheikh also does not believe the current hype around emerging market equities. “We continue to be short on emerging markets equities. I know many people have talked about opportunities in this space because of the Fed’s dovish behaviour. I still think people should be focusing on why the Fed is more dovish, not simply that their recent behaviour is dovish.”
“Selectively holding defensive dividend payers aligns with a few key global macro themes, including low inflation and the gradual recovery in European economic growth,” Sheikh added. “The policy is also to some extent a reflection of our view that central banks may have exhausted their existing policy toolkits. As government bond valuations become richer and richer, we’re beginning to debate the asset allocation implications of governments becoming much more fiscally expansionary.”
“In the post-Brexit landscape, where the yield grab will continue as we venture further into negative rate territory, a preference for quality assets with strong liquidity and a strong focus on broad diversification seems prudent,” he stressed.
