The global economy is already feeling the weight of an impending slowdown. Yields on government bonds plunged across the globe due to several reasons for a worldwide tepid outlook such as worsening trade conflict between the United States and China, prolonged downturn in the manufacturing sectors of the Eurozone and Japan, geopolitical issues like Brexit, and the Italian political turmoil. Moreover, a number of central banks adopted an easy money policy by cutting rates to combat an economic slowdown.
Yields on Government Bonds Suffer Globally
Investors across the world are gradually shifting toward safe-haven sovereign bonds from risky assets like equities to safeguard their portfolio from a likely slowdown. On Aug 7, yield on 10-year U.S. Treasury plunged to 1.59%, the lowest in nearly three years before closing at 1.73% to end the week. More importantly, the benchmark Treasury bond yield has remained below the yield of short-term, 3-month U.S. Treasury Bill for nearly past three months.
At the beginning of 2019, the yield on 3-month bond was hovering around 2.42% while the 10-year security yield was around 2.66%. As of Aug 9, yield on 10-year bond plummeted to 1.73% while the 3-month short-term government bond is yielding 2.05%. According to several economists, this yield curve inversion called for an impending recession of the U.S. economy.
Moreover, yield on 10-year German bunds fell to a record low of negative 0.6%. Yields on 10-year French, Dutch and Japanese bonds also entered into negative territory. British 10-year bond fell to its lowest level ever, yielding just around 0.5%.
Several Central Banks Adopt Rate Cut Measure
On Aug 7, the central banks of three major emerging markets ---- India, New Zealand and Thailand ---- unexpectedly cut interest rates to combat more aggressively against an impending global recession.
The Reserve Bank of India decreased repo rate for the fourth consecutive time by 0.35% to 5.40% in order to boost aggregate demand, especially private investment. The Reserve Bank of New Zealand reduced rate by 0.5% to an all-time low of 1%. The central bank cited trade-related worries as a major cause of concern. Meanwhile, the Bank of Thailand reduced the benchmark rate from 1.75% to 1.5% in a bid to combat a weak global economic outlook and muted inflation.
Moreover, the European Central Bank and Bank of Japan are looking for options for further rate cut despite the fact that both Eurozone and Japan is currently having negative interest rate. On Jun 4, the Reserve Bank of Australia cut benchmark interest rate by a 25 basis point to a historic low of 1.25%.
Fed’s Next Step to Be Crucial
In the United States, Federal Reserve Bank cut the benchmark lending rate by a 25 basis point in Jul 31 for the first time in more than a decade. While Fed Chair Jerome Powell termed this measure as an “insurance cut” against global downturn and trade-related tensions, he has also reiterated his stance to do whatever needed to sustain U.S. economic expansion.
Meanwhile, as of Aug 11, per CME FedWatch, there is 83.5% probability of a 25 basis point cut and 16.5% probability of a 50 basis point cut in benchmark interest rate further in September. This is the result of heightened trade conflict between the United States and China in July.
President Donald Trump is long been an advocate of easy monetary policy blaming the Fed for its less-than-dovish stance as a major hindrance to U.S. economic growth. His view got momentum after the People’s Bank of China set the mid-point of its currency yuan below the psychological barrier on Aug 7 for the first time since May 2008. Moreover, the central bank of China continued to do the same for the next three days prompting the Trump administration to call China a “currency manipulator” for the first time since 1994.
Our Top Picks
Under these circumstances, rate-sensitive investments like utilities and REITs, which offer attractive dividends, will be prudent. We narrowed down our search to five such stocks each carrying either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
All five stocks gained impressively in the past six months and still have upside left.
Exantas Capital Corp. XAN is a real estate investment trust that primarily focuses on the origination, holding and management of commercial mortgage loans and commercial real estate-related debt investments in the United States. It carries a Zacks Rank #1.
The company has expected earnings growth of 60.6% for the current year. The Zacks Consensus Estimate for the current year has improved by 6.5% over the last 30 days. The stock has a dividend yield of 7.89% and climbed 5.3% in the past there months.
Safehold Inc. SAFE acquires, owns, manages, finances and capitalizes ground net leases. It carries a Zacks Rank #1. The company has expected earnings growth of 78.1% for the current year. The Zacks Consensus Estimate for the current quarter has improved by 3.7% over the last 30 days. The stock has a dividend yield of 2.14% and jumped 55.8% in the past there months.
Outfront Media Inc. OUT is a lessor of advertising space on out-of-home advertising structures and sites across the United States, Canada and Latin America. It sports a Zacks Rank #1. The company has expected earnings growth of 8.4% for the current year. The Zacks Consensus Estimate for the current year has improved by 2.6% over the last 30 days. The stock has a dividend yield of 5.17% and jumped 33.1% in the past there months.
American States Water Co. AWR provides water and electric services to residential, industrial, and other customers in the United States. It operates through three segments: Water, Electric and Contracted Services. It carries a Zacks Rank #2.
The company has expected earnings growth of 18.6% for the current year. The Zacks Consensus Estimate for the current year has improved by 2.5% over the last 30 days. The stock has a dividend yield of 1.31% and jumped 21.2% in the past there months.
Unitil Corp. UTL engages in the distribution of electricity and natural gas in the United States. It operates through three segments: Utility Gas Operations, Utility Electric Operations, and Non-Regulated.
This Zacks Rank #2 company has expected earnings growth of 4% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.9% over the last 30 days. The stock has a dividend yield of 2.52% and surged 11.1% in the past there months.
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