While Sels, head of investment strategy at HSBC Private Bank, thinks the long-term outlook for risk-assets remains positive, he believes the greater stability offered by mega caps will hold investors in good stead should the markets again take a turn for the worse. "In the short-term, we believe that markets will continue to be buffeted by political decisions and sketchy economic data," he said.
"Mega cap equities offer an attractive way to build exposure to equity markets in what we expect to be a volatile time for markets."
"We believe that a large part of the recent rally in markets has been fuelled by expectations of further quantitative easing, especially in the US, rather than by a fundamental improvement in the operating environment."
"Moreover, the recent rise of markets has occurred on the back of exceptionally low volumes, which is leading many to question – including us – whether or not the markets could be facing a bout of volatility over the coming weeks as the holiday season draws to a close."
"Impending volatility or not, we are not of the view that the recent run-up in markets should be used as an opportunity to move portfolio positions to underweight."
"In our view, equity valuations are still attractive, which should provide some support if sentiment were to turn sour," he added.
In such an environment, Sels believes companies with high and, more importantly, sustainable dividends are most attractive, which tend to fall under the mega cap category.
"One of the biggest attractions of mega caps is their ability to generate free cash flow and their dividend-paying power," he said.
"Currently the dividend yield on the largest 50 companies in the US equity market is approximately 10 per cent higher than the wider market."
"In our view, companies with the ability to pay and grow their dividends should continue to be in demand from investors in search of yield."
He also points to their ability to better protect against the downside.
"Mega-cap stocks typically perform well in periods of elevated uncertainty as investors tend to perceive them to be lower-risk investments," he explained.
"Indeed, given their size, mega cap stocks tend to be able to withstand periods of economic weakness, but equally do not tend to grow as fast as smaller companies when times are good."
"On the whole, therefore, they tend to have earnings that are less volatile than the wider market and are usually lower-Beta investments."
Sels points to the greater profitability, regional diversification and liquidity, as well as better cost management and lower borrowing costs of mega caps, as the main reasons for their lower volatility.
While valuations of defensive companies such as these have become more expensive, with some experts including Ruffer FE Alpha Manager Steve Russell warning of a bubble emerging in the sector, Sels thinks prices still have a lot further to rise.
He commented: "Although valuations have risen from very low levels, we believe that the mega-cap sector still compares favourably to the market as whole. Moreover, there remains scope for a further upward re-rating in the coming months."
FE Trustnet recently highlighted a selection funds that experts believe would do well in a sustained market rally, as well as those that would protect more effectively against the downside.