Traditionally safe sectors of the Australian stock market are becoming increasingly volatile, according to Goldman Sachs.
In a research note titled Australia: Nowhere to Hide, Goldman strategists Matthew Ross, Bill Zu and Jie Ma have assessed the risks facing defensive stocks on the ASX200.
Defensive stocks are characterised by their low volatility and consistent dividend yields. Example sectors include energy utilities and listed real estate investment groups.
With global central banks indicating that record levels of monetary stimulus are coming to an end, most analysts agree that bond yields look poised to rise.
The Goldman analysts noted that the risks to defensive stocks from higher interest rates have been well documented.
After all, if bond yields rise then global capital currently seeking a return from stable income stocks is likely to shift back into the bond market.
However, they outlined another key risk to the sector — it turns out that the prices of safer stocks usually associated with low volatility (low-vol) have actually been recording historically high levels of beta.
Beta is a measure of how much a stock price moves up or down relative to the broader stock market. This chart from Goldman tells the story:
“The increased systematic risk of these ﬁrms has, however, been overlooked in our view,” the Goldman analysts said.
At the same time as volatility in defensive sectors has been increasing, the analysts said the beta of more volatile stocks has been going the other way.
That means that low-vol stocks now have as much market risk as traditionally high-risk sectors.
In addition, low-vol stocks have significantly higher levels of leverage compared to the broader ASX200:
Goldman said that when the beta of a stock increases, it’s usually due to changes in the broader economy, which has a bigger effect on cyclical stocks or companies with higher leverage.
“The other, typically less common reason, is that the nature of the ‘market’ has shifted,” the analysts said.
“In our view, this is what we are witnessing at present. Interest rate risk seems to be taking over from growth as the key systematic risk in the market.”
The trio included a table of low-vol stocks on the ASX200, based on the level of price volatility over the last four years.
The stocks shaded in blue are further defined by two key factors: they have a dividend yield which is currently more than 20% below their 10-year average, and high levels of debt.
According to Goldman, those stocks are particularly vulnerable to a change in market conditions from a shifting interest rate environment: