Why UBS Is Advising Investors to Stay the Course

Both political and economic uncertainties are rising, from the trade war to Brexit to rising geopolitical tensions across the globe. Legendary investor Ray Dalio sees a 40% chance of a recession in the next two years. Others see over an 80% chance of a recession in the next 12 months. Moreover, Barclays has already announced an “industrial recession.” If not a recession, it’s likely a slowdown can’t be avoided.

Moreover, with the Fed starting the quantitative easing process on July 31, investors are more hesitant to invest in stocks. Bond yields have fallen to a decade low. In the month so far, the bond and equity markets have diverged. The Trump administration has already provided fiscal stimulus in terms of the tax cut. If a recession occurs in the next two years, the US might join the negative-interest-rate club.

Haefele said in the note, “Dividend investing is a defensive investment style that generates regular cash flows for investors and tends to outperform when markets are volatile.” Interestingly, on August 27, the 30-year Treasury yield fell to 1.955%. The S&P 500 Index (SPY) has a dividend yield of 1.9%. The equity index’s dividend yield has risen because of the recent correction.

Utilities and midstream energy stocks could be a good choice for higher-dividend-yield stocks. The Utilities Select Sector SPDR ETF (XLU) offers a dividend yield of 3%. In the utility sector, stocks such as Dominion Energy, Southern Company, Duke Energy, and NextEra Energy could be a good choice.

The Alerian MLP ETF (AMLP) dividend yield is 8.7%. Among energy subsector ETFs, usually AMLP has the least sensitivity to US crude oil prices. Moreover, with rising energy exports to the global market, the need for new energy infrastructure will increase in the US. Midstream stocks such as Enbridge, Williams Companies, and ONEOK could be worth a look.

Among sector-specific SPDR ETFs, the Real Estate Select Sector SPDR (XLRE) and XLU have the highest dividend yields of 3.2% and 3%, respectively. The Consumer Staples Select Sector SPDR ETF (XLP), XLRE, and XLU are the only ETFs that have risen compared to the falls in other sector-specific SPDR ETFs in this month. 

UBS has also advised its clients to invest in gold. It expects gold to surpass $1,600 in the next six months. This month, gold has seen a double-digit rise compared to the slump in the equity market. There’s a high chance the trade war will escalate further before the US presidential election in 2020. This might send gold prices closer to $2,000.

Investors might also want to look at gold mining stocks. On a year-to-date basis, the VanEck Vectors Gold Miners ETF (GDX) has risen 44.9% and outperformed gold active futures and the S&P 500 Index. GDX also offers a dividend yield of 0.3%. Barrick Gold (GOLD) was among the top five buys of billionaire hedge fund manager Stanley Druckenmiller in the last quarter. GOLD is GDX’s top holding.