Defensive yield stocks provide best return: Forsyth Barr

Defensive yield stocks have provided the best return for investors in the New Zealand stock market over the past year, according to research from Forsyth Barr.

Monday, January 15th 2024, 5:31PM

by BusinessDesk

Matthew Leach, a senior analyst at the investment firm, said stocks could broadly be grouped into three thematic classifications: defensive yield, cyclical and structural growth stocks.

A recent research note by Leach said defensive stocks experienced gains of 3.2% on average in the December quarter.

Structural growth and cyclical stocks also finished the quarter in the green with 1.3% and 0.8% average total returns, respectively, it said.

'A defensive nature'

It said the S&P/NZX 50 benchmark closed the quarter with an equally weighted average return of 2%.

For the year, defensive yield stocks were the top performers of the three thematics, with average gains of 4.6%, while cyclical stocks were up 3.6% on average.

However, structural growth stocks experienced a 4.5% decline on average and held the benchmark back, which closed the year up 1.8% on an average basis.

Leach said defensive yield typically included stocks from communication services, consumer staples, real estate and utilities sectors.

Defensive yield stocks typically paid a stable yield and had a stable earnings track, he said.

“Therefore, in times of economic uncertainty, they provide a bit more of a defensive nature,” Leach said.

Cyclical typically included stocks in consumer discretionary, energy, financials, industrials and materials sectors.

Cyclical companies tended to move with the economic cycle, and they could move either with the cycle or against it, he said.

Structural growth typically included stocks in the healthcare and information technology sectors.

Structural growth companies tended to have high levels of growth, and they typically paid low or no dividends, opting instead to reinvest profits back into the company, he said.

Long and short-term success factors

The NZ market comprised 56% defensive yield, 34% structural growth and 10% cyclical stocks.

Australia was more weighted to cyclicals, with those stocks making up 72% of the market. Defensive yield accounted for 16% of the Australian market and structural growth 12%.

The United States features 41% structural growth, 39% cyclical and 20% defensive.

The varying thematic makeup of markets showed why global events caused some markets to respond differently to others, Leach said.

By comparing the relationship between median price-to-earnings ratios with 10-year real yields, the NZ market at the moment appeared to be fairly valued, the note said.

The research note also looked at what factors featured in stocks' long- and short-term success.

Looking at stocks ranked in the top third of the market versus the bottom third, it found that over the past three months, the best factors that determined the success of a stock were low volatility, size, and low gearing.

For the best-performing factors over 12 months, size again featured, along with quality, defined using trends in cashflow and dividend per share forecasts, along with a 12-month forward payout ratio.

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