Runners crest “Heartbreak Hill” in Newton, Massachusetts, during the 111th running of the Boston Marathon. (Photographer: Neal Hamberg/Bloomberg News)

Market Rally Means Investors Must Catch Up or Hope It Fails

(Bloomberg) -- For investors who have missed the epic global stock rally this year, yet worry about jumping on the bandwagon too late, strategies including derivatives, defensive or dividend stocks are being touted as a way out.

Investors have pulled over $30 billion from global equity funds since the start of the year, analysts at Jefferies Financial Group Inc. wrote in a note Friday, citing EPFR Global data. That left them out in the cold as the MSCI AC World Index climbed 11 percent over the same period. With the average equity hedge fund is up only 6 percent this year, according to Goldman Sachs Group Inc., some so-called smart money also underperformed.

“If anything, the fear in professional investors’ mind is now of further upside,” BTIG strategist Julian Emanuel said in an interview Monday. “The mindset continues to be defensive, but runs the risk of bumping up against this tipping point where the psychology of performance-chase could” take hold, he said. The low cost of derivatives offers an opportunity, with options cheap enough to make a good replacement for stocks, he argued.

Market Rally Means Investors Must Catch Up or Hope It Fails

The precipitous decline in global stocks in December, which included the worst month for U.S. equities since 2009, was enough to send many investors to the sidelines. A wave of uncertainty flooded the market, from concerns about the U.S.-China trade dispute, to the then-hawkish outlook for the Federal Reserve, to worries about global growth and downgrades to corporate earnings.

Then trade talks seemed to progress and the Fed took a dovish turn. The S&P 500 Index rebounded 19 percent from Christmas Eve through Tuesday. Yet enough uncertainty remained, about trade and the global economy for starters, that those who had sold down risky positions were reluctant to rush back in.

Dividend Exposure

Investors should look to hedge their most worrying downside risks or seek to express their positive views in a safer way -- such as with income stocks, Vinay Pande, head of trading strategies at UBS Global Wealth Management’s Chief Investment Office, wrote in an email.

“For instance, in Europe, where the next few months are still filled with uncertainty, we have suggested expressing long equity positions via dividend exposure,” he said. “Not only did dividend futures get hit much harder than the broad market, but we also think that many or most European companies would be reluctant to cut dividends if the economy slows.”

Defensive Approach

UniCredit SpA strategist Christian Stocker is also pushing a defensive approach, in his case via food and beverage, health care, telecommunications and utilities stocks.

“We consider it highly likely that global equity markets have almost exhausted their relief potential for the first quarter,” he wrote in a recent note. “In the current environment of slowing global trade, and as long as defensive sectors report stable or even increasing earnings, defensives should demonstrate their superiority over industrial sectors.”

Schadenfreude

Investors who feel it’s too much of a battle to try and catch up with the rally have one more option, if they listen to BTIG’s Emanuel.

“The pain trade is definitely higher,” he said. The rally is “at levels where people are actually hoping the market fails.”

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