INVESTORS in the US are looking for ways to protect themselves from a potential market downturn and rising inflation have been warming to utilities, sometimes seen as bond substitutes, as attractive alternatives.
The S&P 500 and Dow rose in a broad-based rally on Friday with technology, healthcare and financial stocks providing the biggest lift as investors bet on a recovery that is expected to deliver the fastest economic growth since 1984.
Nevertheless, the S&P 500 utilities index has outperformed the broader market this month, rising 9.3% so far compared with a 4.3% gain in the benchmark index and leading gains among sectors for March.
Driving the gains may be a defensive move by investors to position themselves against a potential slide in equities, with worries mounting over higher inflation as seen in the jump in 10-year Treasury yields and over pricey stock valuations, some strategists say.
Utilities tend to do better in a downturn because they pay dividends and offer stability.
“It’s a little defensive positioning,” said for New York’s Merrill and Bank of America Private Bank head of CIO market strategy Joseph Quinlan.
“We have some clients who want to be more defensive but want to stay in the market.”
While the economy is expected to rebound sharply this year from the impact of the coronavirus, that optimism may be dampened by next year if unemployment remains elevated and growth slows more than expected.
“It has been hard to restrain our US growth forecast in recent months. We’ve been upgrading our estimates almost as fast as we lowered them a year ago,” the Northern Trust chief economist Carl Tannenbaum said.
Meanwhile, some investors say utilities also may be benefiting from hopes that there will be a bigger push toward green energy under the Biden Administration. President Joe Biden is expected to unveil next week a multitrillion-dollar plan to rebuild America’s infrastructure that may also tackle climate change.
“If you get any acceleration of the decarbonisation rhetoric, that’s a positive for utilities,” said ClearBridge Investments managing director and portfolio manager Shane Hurst.
But whether the recent surge in utilities has further room to run is a matter of debate, and many strategists and investors, including Quinlan, still favor cyclicals that benefit from economic growth over defensive-leaning groups such as utilities.
The gains in utilities have come amid a rotation from technology and other growth stocks into so-called value stocks. The Nasdaq Composite has fallen in March after four straight months of gains.
As of Friday, the S&P 500 utilities sector had a dividend yield of 3.3%, the second-highest among S&P sectors after consumer staples, and well above the 1.5% yield for the S&P 500, according to data from S&P Dow Jones Indices.