The unpredictable nature of US President Trump’s tweets has created a level of uncertainty in financial markets that hasn’t been seen for quite some time. The inversion of the yield curve in many countries, traditionally regarded as a recessionary indicator, has spooked some market participants. Volatility could well stay elevated for a prolonged period, meaning that investors need to revisit their risk management, including asset allocation, currency hedging and interest rate duration.
Other than the usual safety of cash, US Treasuries and gold, most other asset classes face challenges. In such an environment, dividend-paying stocks become arguably more attractive, particularly focusing on companies characterised by strong fundamentals, which in turn means that payments are more likely to be sustained (and share prices supported) through harsh economic conditions. Combining income-based equity with a quality screen can produce a strategy with a greater chance of filtering out ‘yield traps’.