One of the primary reasons that high dividend defensive assets are the leaders in the current market is that most investors believe inflation worldwide is not an issue. However, in reality, the world is following the example of the U.S Federal Reserve in which every country is trying to fight deflation by adopting an expansionary policy.
This policy will inherently increase inflation pressures. Just about all central banks worldwide are trying to achieve the same goal, which is to create quantitative easing. No one seems to recognize the danger of such policy in the near future.
Now let’s look at how investors are actually positioned in this market. The most popular investments around the world are bonds, of all kinds, which benefit from a lack of inflation. The next most popular are defensive high-dividend equities. Many people are buying these because they perceive high yielding stocks and junk bonds as a safe investment. Meanwhile, those assets which would actually benefit from higher inflation, such as emerging-market equities or anything relating to commodity production have been among the weakest performers.
We continue to believe there is a high probability that investors who are currently betting on lower inflationary expectations, by piling up on yield driven ETFs (XLP, XLU, XLV, IYR, JNK and TLT) as well as the U.S. dollar, will be forced out of their positions by powerful adverse moves.
Sooner than later, inflation will reinstate itself and nvestors are going to be in for a big surprise. As usual, the market does everything in its power to ensure that the majority of investors lose money.