Utilities and Other Defensive Sectors During the Trump Era: Which Perform Best – Particularly Against Tweets?

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Eric Selmon Hugh Wynne

Office: +1-646-843-7200 Office: +1-917-999-8556

Email: eselmon@ssrllc.com Email: hwynne@ssrllc.com

SEE LAST PAGE OF THIS REPORT FOR IMPORTANT DISCLOSURES

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April 6, 2017

Utilities and Other Defensive Sectors During the Trump Era:

Which Perform Best – Particularly Against Tweets?

In this note we examine which of the defensive sectors provides the greatest protection to the risks posed to investors by the Trump presidency. In all of the significant market downturns since 1994, utilities outperformed both the S&P500 and other defensive sectors (telecom, health care and consumer staples). During downturns caused specifically by global events, risks that may be elevated during the Trump administration, utilities were particularly effective defensive investments, outperforming the S&P 500 by 950 basis points and outperforming other defensive sectors by 450 to 730 basis points. During financial crises, utilities also materially outperformed the other defensive sectors, by 480 to 610 basis points.

  • We have analyzed the relative performance of the principal defensive sectors (utilities, telecom, health care and consumer staples) during all market downturns over 1994-2017 where the decline from peak to trough was larger than 8.25%, equivalent to two standard deviations of the 30 day returns for the S&P 500 since 1994.[1] On average over these market downturns, utilities outperformed both the S&P500 and other defensive sectors (telecom, health care and consumer staples). Utilities were particularly effective defensive investments during downturns triggered by global events and financial crises. (See Exhibit 1 below.)

Exhibit 1: Average Outperformance vs. the S&P 500 of Indices of the Principal Defensive Sectors (1) During the Largest Market Downturns, 1994-2017

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1. NASDAQ PHLX Utility Index (UTY); Dow Jones U.S. Telecommunications Index (DJUSTL); Dow Jones U.S. Heath Care Index (DJUSHC); Dow Jones U.S. Consumer Goods Index (DJUSNC)

Source: Bloomberg, SSR analysis

  • Exhibits 1 and 3 present the relative performance of the utilities during the 27 principal market downturns since 1994. During these market downturns, regulated utilities have outperformed the S&P 500, on average, by 860 basis points. The average outperformance of the consumer staples and health care sectors, by contrast, was only 520 and 510 basis points, respectively. Telecoms outperformed by only 210 basis points, on average.
  • The outperformance of the utilities relative to other defensive sectors was strongest during the 10 market downturns that reflected global concerns; during these downturns, utilities outperformed by 950 basis points, on average, the relative performance of the utilities exceeded that of other defensive sectors by 450 to 730 basis points (Exhibits 1 and 4).
    • This likely reflects the exclusively domestic businesses of the overwhelming majority of U.S. utilities, which have effectively insulated the sector from the impact of global crises.
  • Utilities’ outperformance has been less strong during downturns triggered primarily by domestic concerns; during these downturns, utilities outperformed the health care and consumer staples sectors, on average, by ~130 basis points (Exhibits 1 and 5).
    • The large international markets of U.S. health care and consumer staples companies offers their shareholders protection during domestic economic downturns.
  • Similarly, while regulated utilities have outperformed other defensive sectors during downturns brought on by the fear of a U.S. recession, during these downturns utilities’ outperformance has exceeded that of the internationally diversified health care and consumer staples sectors by only 340 to 380 basis points, respectively (Exhibits 1 and 6).
  • By contrast, during downturns brought on by financial crises, the outperformance of the utilities relative to other defensive sectors has been particularly strong: 480 basis points relative to the telecom sector and 530 basis points relative to consumer staples (Exhibits 1 and 7).
    • As state regulated monopolies operating critical infrastructure assets, utilities have maintained access to the capital markets even during severe credit disruptions such as occurred during 2007-2008.
    • In recent years, several financial crises have had their origins abroad (see Exhibit 8), enhancing the appeal of domestically focused utilities as defensive holdings.
    • During these international financial crises, moreover, investors have sought the safety of U.S. Treasury bonds, driving long term rates down and utility valuations higher. This has also tended to strengthen the dollar relative to other currencies, reducing the value for U.S. based investors of the foreign earnings of internationally diversified health care and consumer staples companies.
  • The historical outperformance of regulated utilities during market downturns driven by global concerns, combined with attractive expected returns due to strong rate base growth (see our note from October 5, 2016, “The Argument for an Overweight Position in Regulated Utilities”), render them particularly attractive defensive investments in the context of the Trump administration’s erratic management of international affairs and U.S. trading relationships.

Exhibit 2: Heat Map: Preferences Among Utilities, IPP and Clean Technology


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Source: SSR analysis

Details

Exhibit 3: Relative Performance vs. the S&P 500 of Indices of the Principal

Defensive Sectors during the Largest Market Downturns, 1994-2017 (1)

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1. Includes all market downturns over 1994-2017 lasting less than 6 months and where the decline from

peak to trough was larger than 8.25%, equivalent to two standard deviations of the 30 day returns for the

S&P 500 since 1994.

Source: Bloomberg, SSR analysis

Exhibit 4: Relative Performance of the Principal Exhibit 5: Relative Performance of the Principal

Defensive Sectors during the Market Downturns Defensive Sectors during the Market Downturns

Due to Global Events, 1994-2017 (1) Due Primarily to Domestic Events, 1994-2017 (1)

1. See Exhibit 8 for list of events. 1. See Exhibit 8 for list of events.

Source: Bloomberg, SSR analysis Source: Bloomberg, SSR analysis

Exhibit 6: Relative Performance of the Defensive Exhibit 7: Relative Performance of the Defensive

Sectors during Market Downturns Due to Fears of Defensive Sectors during Financial Crises,

Recession, 1994-2017 (1) 1994-2017 (1)

1. See Exhibit 8 for list of events. 1. See Exhibit 8 for list of events.

Source: Bloomberg, SSR analysis Source: Bloomberg, SSR analysis

Exhibit 8: Largest Market Downturns, 1994-2017, and Their Principal Contributing Factors (1)


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1. Includes all market downturns over 1994-2017 lasting less than 6 months and where the decline from peak to trough was larger than 8.25%, equivalent to two standard deviations of the 30 day returns for the S&P 500 since 1994.

Source: Bloomberg, SSR analysis

Exhibit 9: Relative Performance of the Defensive Sectors during the Largest Market Downturns, 1994-2017 (1)

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1. Includes all market downturns over 1994-2017 lasting less than 6 months and where the decline from peak to trough was larger than 8.25%, equivalent to two standard deviations of the 30 day returns for the S&P 500 since 1994.

Source: Bloomberg, SSR analysis

©2017, SSR LLC, 225 High Ridge Road, Stamford, CT 06905. All rights reserved. The information contained in this report has been obtained from sources believed to be reliable, and its accuracy and completeness is not guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein.  The views and other information provided are subject to change without notice.  This report is issued without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is not construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results.

  1. We list these downturns, and their principal contributing factors, in Exhibit 8, and in Exhibit 9 present the performance of the principal defensive sectors vs. the S&P 500 during each of these downturns.
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