The Case for Low-Volatility, High-Dividend Equities

Given market uncertainty and the risk of a US recession, is now the time for defensive stocks? Making a case for low-volatility, high-dividend equities with Franklin Templeton Investment Solutions’ Vaneet Chadha and Michael LaBella.

After a horrendous 2022, equity markets had a rocky—but positive—first quarter, even though inflation has proven to be sticky, central banks are still raising interest rates, and lending standards have tightened. This has many investors questioning: “Is now the time to be taking risk?” Economic uncertainty is likely to continue driving volatility in 2023, with risk skewed toward the downside. We think that reducing exposure to risk assets while increasing exposure to defensive equities with lower volatility and higher potential dividends may help weather continued market turbulence.

The 2023 market narrative

We expect this year’s market narrative to focus on earnings as investors look for directional insights. As our team has written about previously, bank lending has tightened—and is tightening—across sectors. In our view, recession risk is therefore increasing. Of particular concern is the potential for a negative feedback loop—tighter credit conditions, characterized by an inability to get loans or a higher cost of financing, could lead to less cash on hand for companies and consumers, which could then lead to lower deposits (assets) at the banks, contributing to even tighter credit conditions.

Meanwhile, earnings growth has slowed to the point where last quarter, they declined as profit margins were getting squeezed.