Opinion  

In a quiet summer, one unusual trend stands out

Dan Jones

There’s something reassuring in the knowledge that, despite all 2016 has thrown at us so far, investment types can still determinedly down tools in summer to ensure August remains as deathly dull as ever.

Low volatility is partly due to central bank largesse, and we did have major easing from the Bank of England at the start of August. Since then, silence.

This, at least, is the general consensus. But when it comes to equity market styles, it may just mean there are frequencies to which investors haven’t yet tuned in. Because an unusual sound is beginning to make itself heard.

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The noise in question is the spluttering sound that is now faintly emanating from the dividend-paying quality stocks that had previously been powering ahead. Over the past couple of months, the S&P Dividend Aristocrats index has started underperforming the wider US market.

Not a bad thing, insofar as it suggests investors are finally becoming more optimistic over the trajectory of the US economy and corporate sector. But could this finally spell the end of one of the most notable trends of the current bull market?

Two months is no kind of time frame, but there have been other signs. Value stocks’ return to outperformance – one of those changes for which so many were positioning at the start of this year – has indeed taken place.

The MSCI USA Value index has risen by 21.2 per cent this year, five percentage points above its Growth counterpart. That suggests investors are confident enough to back struggling companies to turn things around.

Another factor acting against quality stocks is tightening monetary policy. Other developed market economies – Europe, the UK and Japan – are doing just the opposite, which hardly suggests dividend payers will start struggling elsewhere.

But American investors’ habits are often mimicked overseas, so it shouldn’t be surprising that ‘dividend income’ stocks suffered their first outflows in two months at the end of August, according to Bank of America Merrill Lynch.

Value stocks outside the US have also begun to outperform compared with their low beta peers since the start of July.

Countering this is the prevailing need for income. With bond yields falling further, equities look set to take up a still-greater portion of retail investor portfolios in the coming months, and you’d imagine income payers will be in the most demand.

Analysts at Nomura say that low-volatility strategies “aren’t working” at present not because valuations of dividend stocks are too high, but due to a broader increase in risk appetite.

But they predict any fresh turmoil will see low-volatility products outperform again, irrespective of many of these stocks’ rich price-to-earnings multiples. So are the summer’s developments a muffled warning, or just white noise? At the very least, it’s a question worth asking during these quieter moments.