How Are Yield-Seeking Investors Dealing With The Low Interest Rate Environment?

Ever since the Great Financial Crisis erupted in 2008, the world has pretty much been mired in a low interest rate environment. This is causing a headache for yield-seeking investors.

Europe and Japan have negative interest rates while the UK had to cut interest rates recently to support its economy following Brexit. The US, despite having raised interest rates late last year for the first time in nearly a decade, still sees its benchmark interest rate at generational lows.

The utilities solution

One of the ways that investors in the US are dealing with a lack of yield is to turn to utilities stocks. But that has also caused problems.

In a 2013 report prepared by Ernst & Young, it was written that “investors aggressively pursuing yield had pushed utility valuations to pre-financial crisis levels.” The climbing valuations of utilities stocks is a theme that has continued to today, as data from a recent Bloomberg article has shown.

A December 2015 article from asset manager Fidelity Investments also revealed that utilities stocks in the US were yielding over 5% in 2008. But, this yield has since fallen to around 4% toward the end of 2015.

Fidelity Investments think that there are a few reasons why utilities stocks appeal to investors who are seeking income and capital preservation. These are “business stability (predictable earnings streams), a defensive-oriented nature (outperformance during economic downturns or “risk-off” market environments), and relatively low volatility (less economic sensitivity).”

The Singapore case

In Singapore’s stock market, some stocks that belong to the utilities sector include Hyflux Ltd (SGX: 600) and Keppel Infrastructure Trust (SGX: A7RU). Utilities stocks have been popular amongst investors in the US, but the same may not be said in Singapore.

Over the past year, shares of Hyflux and Keppel Infrastructure Trust have fallen by 29% and 5%, respectively. But this has also resulted in the two stocks’ valuations having declined or being maintained – again an opposite of what is occurring in the US. Hyflux’s price-to-book (PB) ratio has fallen by nearly half in the last 12 months while Keppel Infrastructure Trust’s PB ratio has remained flat.

So while US investors have been turning to utilities stocks to ease their yield hunger, investors in Singapore have been turning elsewhere.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Ong Kai Kiat does not own shares in any companies mentioned.