U.S. utilities stocks have outperformed other traditional havens in recent days, as worries over the spreading coronavirus epidemic sparked a rush to safety.
The S&P 500 Utilities index is up about 3.2 per cent since Jan. 21, when the first case of coronavirus was reported in the United States. The index has risen 6.6 per cent this month, logging its best monthly gain since 2016 and beating every other sector in the S&P.
By comparison, gold rose 1.8 per cent in that period, while the Japanese yen notched a 1.6 per cent gain, and the dollar edged lower. The ICE BofA US Treasury Index, which tracks the performance of U.S. dollar-denominated sovereign debt publicly issued by the U.S. government in its domestic market, rose 2 per cent.
“Not all safe-haven assets are created equal,” said John Praveen, portfolio manager for QMA, the quantitative equity and global multiasset solutions business of PGIM in Newark, N.J. Comparatively high yields and expectations of steady earnings during troubled times have made utilities a popular destination for nervous investors. With the economic toll of the coronavirus outbreak still unclear, utilities have more recently attracted those seeking to reduce exposure to riskier assets while still remaining in equities, which have outpaced most other markets over the past decade. “Markets are ... not expecting the end of the world,” said Juha Seppala, director of the macro asset allocation strategy team at UBS Asset Management. “You want to be defensive, you want to reduce your risk, but you don’t want to be completely out of the market.”
The benchmark S&P 500 Index is down about 3 per cent since Jan. 21 but remains close to record highs earlier last month. Betting against stocks has been a losing strategy during the more-than-decade-long bull market: The S&P gained 29 per cent last year despite a trade war between the United States and China and worries over a slowdown in global growth.
Analysts at Goldman Sachs said they expected a 0.4 percentage point hit to U.S. annualized growth in the first quarter, followed by a rebound in the second.
High yields in utilities stocks have been another draw for investors at a time when Treasury yields are near historic lows. The S&P utilities sector sports a dividend yield of nearly 3 per cent, compared with 1.6 per cent and 2.2 per cent for 10-year Treasuries and the S&P 500, respectively, according to Refinitiv data.
The dollar, which often rises during times of market stress, has declined 0.3 per cent since Jan. 21. Weaker-than-expected U.S. data on Friday – the Chicago Purchasing Management Index fell to a lower-than-expected 42.9, the lowest since December, 2015, as new orders tumbled and producers forecast tepid activity in 2020 – sent the dollar index down 0.5 per cent on Friday.
A drastic worsening of the virus outbreak could push Treasury yields lower and further boost the appeal of utilities, some analysts believe.
“The yield differential between Treasuries and utilities will get even wider so I would not necessarily think that, at least in this period, utilities are going to underperform Treasuries,” Mr. Praveen of PGIM said.