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By: Mark Barnes, PhD, and Christine Haggerty
Few sectors escaped this year’s global equity selloff in Q3, but those most vulnerable to the punishing effects of the recent spike in interest rates have paid an especially heavy toll.
As we cover in the latest GIR Performance Insights report, real estate, telecom, utilities and tech were the worst performers in most markets in Q3 (highlighted below in shades of red). This was particularly the case in the US, UK and Europe, where bond yields have risen the most rapidly as their central banks have embarked on their unwavering rate-hiking regimes.
Regional benchmark and industry returns (TR, LC %) – Three months ended September 30, 2022
Source: FTSE Russell. Data as of September 30, 2022. Equity markets data based on: FTSE USA, FTSE UK, FTSE Europe ex UK, FTSE Japan and FTSE Developed Asia Pacific ex Japan Indexes and Industry Classification Benchmark (ICB®) industry groups. Past performance is no guarantee to future results. Please see the end for important disclosures.
While all stocks are sensitive to some degree to shifts in monetary policies and their impact on borrowing costs and economic activity, some are especially vulnerable to the kinds of big upward surges seen this year. These include utilities, REITs and telecommunications, which are typically viewed as “bond substitutes” because they often pay high dividends and are favored for the income they provide investors. Rising bond yields diminish the relative appeal of these income-generating stocks.
Other stocks are sensitive to rising rates because of their business models. Obvious examples are companies engaged in real estate, such as homebuilders and mortgage finance companies, which get pummeled by the double whammy of a slowing economy (i.e., weakening demand) and higher mortgage rates. Any business that relies on prospective buyers getting loans – e.g., automakers and car dealerships – suffer from higher lending rates.
Tech stocks and other groups that trade at high relative valuations have joined this club of late because rising rates erode the present value (and thus the attractiveness) of their future earnings. The upswing in US bond yields has also helped fuel the epic rally in the US dollar this year, creating another major headwind for tech companies, which generate a substantial share of their revenue from outside the US.
But it’s all relative
With the exception of technology, these rate-sensitive industries typically comprise only a tiny share of each index. For example, exposures to real estate stocks range from 1.2% of the FTSE Europe ex UK to nearly 8% of the FTSE Developed Asia Pacific ex Japan index. Thus, while a major drag in combination, when viewed individually, their effect on overall benchmark performance in Q3 was a relative non-event.
Industry weights (% of index) – as of September 30, 2022
Source: FTSE Russell. Data as of September 30, 2022. Equity markets data based on: FTSE USA, FTSE UK, FTSE Europe ex UK, FTSE Japan and FTSE Developed Asia Pacific ex Japan Indexes and Industry Classification Benchmark (ICB®) industry groups. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
This point becomes even more apparent when examining the industry-weighted contributions to market returns below. All four rate-sensitive industries (except for UK tech) contributed to market losses in Q3. However, for real estate, telecom and utilities, the individual impact paled in comparison to those of industries that make up a bigger portion of each market – e.g., financials and health care in most markets and technology in the US and Asia Pacific.
Industry-weighted contributions to returns (TR, LC %) – Three months ended September 30, 2022
Source: FTSE Russell. Data as of September 30, 2022. Equity markets data based on: FTSE USA, FTSE UK, FTSE Europe ex UK, FTSE Japan and FTSE Developed Asia Pacific ex Japan Indexes and Industry Classification Benchmark (ICB®) industry groups. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
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Originally Posted October 6, 2022 – Rate-sensitive stocks: a global Q3 casualty
Disclosure: FTSE Russell
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