Blue chips the only sensible option for equity investors

Investing in high-quality multi-national companies with defensive earnings streams is the only way to make money in the current environment without taking on excessive risk, according to William Sels, UK head of investment strategy at HSBC.

"With economic growth slowing around the globe, the outlook for corporate earnings is becoming more challenging," said Sels.

"We believe that focusing on sectors that offer relatively defensive earnings streams, as well as high-quality blue chip dividend-paying stocks, should help shelter equity portfolios from the expected volatility."

Since economic growth in the developed world is slowing, Sels believes the ability to generate and pay out income via a dividend has become more important to UK investors.

"In periods of economic weakness, and the associated equity market volatility, companies that offer a high dividend yield have historically performed well relative to the wider market," he explained.

"This can partly be explained by the fact that it tends to be the defensive sectors that have offered the highest dividend yield, but this is not always the case, and in times of heightened market volatility the opportunity to purchase a number of large cap companies with strong cash flows and a well-covered dividend can arise."

Although stocks paying higher dividend yields have outperformed recently, Sels believes there is still a lot of value in the area.

He commented: "Diversified exposure to this area of the equity market can continue to add to performance, while helping limit portfolio volatility."

"Valuations for high yield equities are still undemanding in our view; furthermore they have the potential to provide some much sought-after income at a time when the traditional asset classes yield very little."

If Sels’ prediction is correct, a number of small and mid cap-focused funds in the UK Equity Income and UK All Companies sectors could be set for a reversal in fortunes.

Unicorn UK Income and PFS Chelverton UK Equity Income are both among the five best-performing funds in the UK Equity income sector over three years, with returns of 82.46 and 57.88 per cent respectively.

With returns of 147.77 per cent, MFM Slater Growth is the best-performing fund in the entire IMA UK All Companies sector since October 2008.