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5 Safe Picks Amid Yield Inversion and Geopolitical Concerns

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On Aug 12, Wall Street closed lower following another flare-up in the U.S.-China trade dispute, heightened geopolitical issues and concerns about a global economic slowdown. The three major stock indexes --- the Dow, S&P 500 and Nasdaq Composite --- fell 1.5%, 1.2% and 1.2%, respectively.

Throughout this month, U.S. stock markets are witnessing extreme volatility. Equities are suffering as investors are flocking to safe-haven sovereign bonds. This shift in the investment pattern has two consequences. First, major stock indexes are collapsing as the Dow, the S&P 500 and the Nasdaq Composite have lost 3.6%, 2.7% and 3.8%, respectively, so far in August. Second, yield on U.S. Treasury bonds is gradually falling.

Partial Inversion of Treasury Yield Curve

On Aug 12, yield on the benchmark 10-year US Treasury Note plummeted 9.1 basis points to 1.64%, its lowest since October 2016. The 2-year US Treasury Note yield dropped 5.1 basis points to close at 1.578%. Meanwhile, the yield on long-term 30-year US Treasury Note plunged 11.1 basis points to 2.13%. This government bond is only three basis points away from its all-time low set in July 2016. However, the short-term 3-month Treasury bill is currently yielding around 2%.

The yield curve (which measures interest at any given point of time for bonds of same quality but different maturity dates) of government bonds are generally upward sloping, implying that a higher rate of interest is needed for individuals to hold longer maturity bonds. However, an inverted yield curve is generally characterized as market’s diminishing expectations about future economic growth.

In fact, several economists consider inversion between the 3-month and 10-year bond yields as a clear indication of an upcoming recession. However, a more powerful indicator is the yield inversion between 2-year and 10-year U.S. Treasury Notes, which is currently just 6 basis points away from taking an inverted shape.

Heightened Geopolitical Concerns

The three-month old political protest in Hong Kong against the Chinese establishment took an ugly turn on Aug 12 as about 5,000 protesters entered Hong Kong International Airport, one of the world’s busiest, forcing the authority to cancel over 100 flights for the rest of the day.

The mass movement started after the Chinese government introduced an extradition bill in April following which Hong Kong citizens can be extradited to mainland China to face trial if suspected of crime against the Asian giant. The movement now takes a pro-democracy turn against the communist China.

However, Hong Kong is the largest financial hub of Asia and a major tourist spot. Hong Kong’s financial relation with Europe and the United Sates is crucial to the global economy. Several economists warned that further escalation of political turmoil in Hong Kong may be a bigger threat to the global economy than the U.S.-China trade spat.

On Aug 12, Argentina’s peso fell 15.3% against the U.S. dollar after a surprise result of a primary election for the country’s president. Alberto Fernández won more than 47% of the vote against the incumbent Mauricio Macri’s less than 33% vote.

Investors fear that Alberto Fernández’s chance of winning the final election in October will bring along a populist policy, overstepping the business-friendly policy adopted by Mauricio Macri. Notably, Argentina is long facing an economic downturn with an unemployment rate of 9.5% and inflation rate of a significant 55%.

Last week, Italy’s hard-right league leader Matteo Salvini pushed the country into a political turmoil following his party’s departure from prime minister Giuseppe Conte's coalition government. Political disturbance is likely to disturb the country’s fragile economy, which has expanded only once in the last five quarters. The country is suffering from high sovereign debt and its economic-reform process may be jeopardized.

Meanwhile, second-quarter 2019 GDP of the U.K. contracted 0.2%, for the first time since late 2012.  Manufacturing declined 2.3% in the second quarter, marking its biggest quarterly fall since the first quarter of 2009. Market watchers cited lingering political turmoil related to Brexit as the primary reason for the economy’s downturn.

5 Top Safe Picks

Under these circumstances, investing in defensive stocks like gold, REITs, healthcare utilities and telecom will be prudent. We narrowed down our search to five such stocks each carrying a Zacks Rank #1 (Strong Buy) and bearing strong growth potential. You can see the complete list of today’s Zacks #1 Rank stocks here.

All five stocks gained impressively in the past three months and still have upside left.

Alamos Gold Inc. (AGI - Free Report) engages in the acquisition, exploration, development and extraction of gold deposits in North America. It also explores for silver and precious metals. The company has expected earnings growth of 280% for the current year. The Zacks Consensus Estimate for the current year has improved by 46.2% over the last 30 days. The stock has jumped 51.6% in the past three months.

Chemed Corp. (CHE - Free Report) provides hospice and palliative care services to patients through a network of physicians, registered nurses, home health aides, social workers, clergy, and volunteers in the United States. It operates through two segments, VITAS and Roto-Rooter. The company has expected earnings growth of 15.3% for the current year. The Zacks Consensus Estimate for the current year has improved by 7.8% over the last 30 days. The stock has jumped 30.3% in the past three months.

Safehold Inc. (SAFE - Free Report) acquires, owns, manages, finances and capitalizes ground net leases. The company has expected earnings growth of 78.1% for the current year. The Zacks Consensus Estimate for the current quarter has improved by 3.7% over the last 30 days. The stock has climbed 6.9% in the past there months.

Franco-Nevada Corp. (FNV - Free Report) is a gold-focused royalty and stream company with additional interests in platinum group metals and other resource assets. The company has expected earnings growth of 24.8% for the current year. The Zacks Consensus Estimate for the current year has improved by 9% over the last 30 days. The stock has surged 24.6% in the past three months.

DaVita Inc. (DVA - Free Report) provides kidney dialysis services for patients suffering from chronic kidney failure or end-stage renal disease. It operates kidney dialysis centers and provides related lab services in outpatient dialysis centers. The company has expected earnings growth of 32.8% for the current year. The Zacks Consensus Estimate for the current year has improved by 12.1% over the last 30 days. The stock has surged 15.1% in the past three months.

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