(MoneyMarketing) - Less correlated stocks have outperformed the US and UK benchmarks in February 2022. They also show signs of resilience in the current economic environment marked by high volatility. This is what research by asset manager Collidr found as it estimates that the UK stock market entered a period of high volatility on 21 January 2022.
This was due to concerns over inflation combined with the escalation of tensions in Eastern Europe.
In such circumstances, Collidr warned that an index disproportionately comprising of growth shares is more at risk of further corrections.
This is the case for the S&P 500 in which seven stocks make up 25% of the index by market capitalization.
But the research found that shares that are less correlated or uncorrelated to the others in an index can better protect portfolios.
In addition, they can also improve overall returns in high volatility periods.
This is because these shares often have specific or idiosyncratic features to their performance.
As result, it allows their share price to perform better even when the rest of the stock market falls.
Collidr attributed correlation coefficient from 0 to 1 to a range of UK shares. A correlation coefficient of one represented a perfect correlation with the FTSE 350, while a figure of zero represented no correlation with the index.
Ten of the shares in its least correlated list have correlation coefficients of less than 0.5.
It means they are less correlated with the rest of the FTSE 350 and might be less likely to fall as sharply when the index falls.
The research indicates that it is also true for other markets such as Eurostoxx-ex-UK and Nikkei 225 indices.
Collidr chief executive officer Symon Stickney said: “Picking shares that don’t move with the rest of the market in high volatility can help investors protect their portfolios and build wealth.
“It’s the same principle if the volatility is caused by a sudden turn in the interest rate cycle, geopolitical tensions or another unpredictable shock.
“Investors can give themselves a better chance of improving their returns by understanding how markets work and how volatility is a critical factor.”
Consumer staples, healthcare, and consumer discretionary were the sectors in the UK where Collidr found the most opportunities.
In the US, it identified the most less correlated and uncorrelated shares in the consumer staples, healthcare, and industrials sectors.
Stickney also warned that the buy and hold strategy is not likely to work in the coming years.
He said: “A simple ‘buy and hold’ strategy tends to work well in the benign conditions that have dominated the last decade.
“A lot of that growth can be wiped out very quickly if it all moves downwards in lockstep when volatility rises.”
The research also found that investors should be careful not to over-concentrate in a particular sector and warned against holding assets that are too illiquid.
Equity curve for the FTSE 350 Index (black) against an equal weight portfolio of low-correlation equities (red).
With the ongoing conflict in Ukraine, Stickney believes that the current high level of volatility is set to last.
He said: “We are looking at an event here that will redefine, not just Europe, but all the global lines.
“No matter how quickly or not it gets resolved, the long-term implications of this are very substantial, because every region of the world are involved in their own way.
“That makes it very complicated for investors to look through that and find a decision.”
By Jean-Baptiste Andrieux
