MARKETS SPECTATOR: Variation on a growth theme

Goldman Sachs says investors are rotating from defensive high yielding stocks to those with a more sustainable mix of capital and growth.

In a recent research report from the Goldman Sachs strategy team, the group has been rebalancing its dividend portfolio from pure defensive high yield stocks to those that have more of a balance between dividend and growth.

The broker notes that cash is continuing to flow into the equity market and there is some rotation occurring towards stocks with income and growth. This is occurring from defensive, high yield names as investors look for a mix of income and capital growth, and is one of the broker's themes for 2013.

Despite the recent gains among equities, Goldman believes the theme is still intact. The broker remains very cautious on the outlook for ‘expensive’ defensives. "We worry about the valuation risk of rising bond rates and the extent to which some firms have been under-investing in growth to maintain unsustainably high dividends,” Goldman said.

Going forward, the broker believes the appetite for yield will remain a strong thematic, but investors will seek more exposure to improving markets while still wanting to avoid owning lower quality, highly leveraged names.

Hence, Goldman is adding United Group (UGL), Toll Holdings (TOL) and Incitec Pivot (IPL) to its portfolio while removing Brambles (BXB), Fletcher Building (FBU), Lend Lease (LLC), Seek Ltd (SEK) and Woodside Petroleum (WPL).

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