'Virus-defensive' stocks started to outperform in January, before the broader market plunged

Published Sat, Mar 21 202011:04 AM EDT

Jesse Pound @/in/jesse-pound @jesserpound

Investors who closely tracked how stocks performed while the coronavirus was still largely in China could have built a portfolio well-designed for the market sell-off, according a new note from Nomura Instinet. The firm's analysts found that the industries that have performed best in recent weeks showed signs of their defensive nature in late January, and that building a hedged portfolio based on this information would have created large returns — a "virus-defensive portfolio." "We show that since the effects of the virus began to be felt in the U.S., the Coronavirus Hedge Factor has generated a return of 40%," the note said, while the broader market fell 29% over the same period. To build the portfolio, Nomura looked at how sectors of the Russell 1000 performed during the last 10 days of January, when the coronavirus crisis was still largely in China. Then, the firm's analysts tested the performance of the Russell 1000 stocks to those sectors in 2018 and 2019 The portfolio then bet on the stocks that had the most exposure to the defensive sectors, and shorted those that best tracked the underperforming sectors. The result was a hypothetical hedged portfolio that would have far surpassed the broader market in recent weeks. From Feb. 5 to Feb. 21, the hedged portfolio and the S & P 500 were close, but once the coronavirus began to spread in the United States and Europe, they moved sharply apart. "While the Coronavirus Hedge Factor was gaining, the S & P was collapsing, as its underperformance started around this time," the note said. Many of the top stocks in the portfolio are utilities, such as Nextera Energy and Dominion . Food company Hershey was another top stock for the strategy, as was consumer staples company Kimberly-Clark . The strategy would have told investors to bet against several energy and semiconductor stocks. Energy stocks have been hit by a low price of oil, which has seen a drop in demand due to the pandemic and a price war between Saudi Arabia and Russia that is pressuring prices.

Traders work on the floor at the opening bell of the Dow Industrial Average at the New York Stock Exchange on March 18, 2020 in New York.

Bryan R. Smith | AFP | Getty Images

The firm's analysts found that the industries that have performed best in recent weeks showed signs of their defensive nature in late January, and that building a hedged portfolio based on this information would have created large returns — a "virus-defensive portfolio."