Defensive sectors rebound

05-17-2022
Defensive sectors rebound

This single stock could offer diversified exposure

The effects of the Russian invasion of Ukraine continue to reverberate in the global economy, with the International Monetary Fund becoming the latest global institution to reduce its forecast for 2022 GDP growth, to 3.1% from 4.12%.

Nevertheless, global growth is continuing, and certain areas, such as commodity producers, defense companies, healthcare, and utilities, continue to perform better than the major indexes. These sectors are regarded as either beneficiaries of the increased global tensions or as defensive sectors that may provide protection,

So far this year, the U.S. indexes are down between 5% (the Dow Jones Industrials) and 15% (Nasdaq), while Canada, Australia, and the U.K., with large exposures to oil and gas and materials, are either flat or up slightly by 2%-3%. The MSCI World Index is down 8%, the MSCI EAFE Index of developed markets excluding North America is off 9%. Japan and Germany are down 14% and 18% respectively.

Mega-cap techs revalued

Looking at individual stocks, what is apparent is that the large-capitalization tech stocks, which have led the market for the last five years, are now definitely trending to the downside. The biggest losers include Meta Platforms Inc. (down 31% in the past 12 months) and Netflix Inc. (down a remarkable 38%). Twitter Inc. is down 18% from its year-ago price, which is why it made an attractive takeover target for billionaire Elon Musk.

This compares with the S&P 500 and Nasdaq indexes, which are up 5% and down 1% over the same period, respectively. The 25% plunge in Netflix’s share price on April 19, when it announced the loss of two million subscribers for the quarter ended March 31, demonstrates how vulnerable these highly valued companies are to any change in perceptions about the sustainability of their growth.

So far this year, ARK Innovation Fund, the poster child for the high-growth, disruptive technology companies that aren’t making any money yet, is down 54% over the last 12 months.

Long-term bond yields are up by over 1%, with the benchmark 10-year US Treasury note yielding 2.9%. Moreover, the yield curve is flattening, meaning the difference between short-term and long-term rates is narrowing Shorter-term bond yields are up an even greater amount, by 2.3% to 2.48% for U.S. two-year Treasury notes and by 2% to 2.83% for five-year Treasury notes. Essentially, this means the valuations attributed to so-called long duration assets, whose earnings stretch far into the future, are being marked down sharply.

Energy gains

By contrast, energy stocks are soaring, helped along by concerns over energy security after the Russian invasion of Ukraine and consequent sanctions on its oil exports by the U.S., U.K., and Canada. The S&P Energy Index up 68% over the last 12 months, while the S&P/TSX Energy Index up 108%.

US energy majors are driving the big gains, including ConocoPhillips, which is up 103%. In Canada, Canadian Natural Resources Ltd. has gained 120% over the same period, while Cenovus Energy Inc. is ahead 129%.

Materials stocks have also risen sharply year to date, as have pharmaceutical issues, defense contractors, and Canadian pipelines.

The outperformance of these types of stocks over the last year, including through this year’s bond market rout and major correction in the indexes, demonstrates the value of owning less-volatile stocks with a reliable income stream.

Diversified conglomerate

But is there a single stock that combines exposure to many of those sectors that have proved robust in the present difficult environment? I believe the Hong Kong-listed CK Hutchison Holdings (OTC: CKHUY) can fill the bill here.

Hutchison is the holding company for the diversified interests of Hong Kong’s wealthiest man, Li Ka Shing. It owns the world’s leading ports network, with interests in six of the 10 busiest container ports in the world. Its A.S. Watson retail division is the world’s largest Health and Beauty retailer, with a 142 million loyalty member base. It operates 12 retail brands with 16,398 stores in 28 markets worldwide.

For the year ended Dec. 31, the company reported 10% growth in revenues, to $57.1 billion, with 15% growth in earnings before interest tax, depreciation & amortization (EBITDA), to $17.4 billion.

It is very well diversified both geographically and by type of business. It gives investors exposure to both relatively stable, if slow-growth, businesses like power and water companies and drugstore chains, along with more economically sensitive operations such as container ports and mobile phone networks.

Hutchison announced a final 2021 dividend of $0.238, an increase of 9% on 2020. Combined with the $0.102 interim payment, that gave a total of $0.341, a 15% increase for the year, equivalent to a 4.79% yield. As an ADR, the dividend will be subject to foreign withholding tax.

Gavin Graham is Chief Strategy Officer of Calgary-based SmartBe Investments. He is a veteran financial analyst, money manager, and a specialist in international investing, with over 35 years’ experience in global investment management.

Notes and Disclaimer

Content © 2022 by Gavin Graham. This article is an edited version of a longer article originally published in the April 28 issue of The Income Investor newsletter. Used with permission.

The commentaries contained herein are provided as a general source of information, and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Investors are expected to obtain professional investment advice.

The views expressed in this post are those of the author. Equity investments are subject to risk, including risk of loss. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.