Crises come and go, with some leaving lasting scarring tales on their way. During periods of economic downturns and heightened uncertainty, investors overreact by moving out of risk assets into the so-called havens. When economies are emerging from a depression similar to the one we had recently, quality stocks are put on the sidelines as investors seek high beta stocks. While ditching quality during an economic expansion may seem wise , our graph below shows that holding such stocks across cycles can be profitable.
Quality style screens for companies that generate predictable earnings, have moderate earnings growth and sound capital management. These companies underperform other styles geared towards cyclical counters during an economic boom. But they do well over time and provide downside protection.