1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 25
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
Quality investing also tends to earn its keep during volatile markets. Historically, quality stocks
have outperformed global equity indices during periods of elevated financial market volatility.
Even when volatility is low, quality companies have delivered slightly better returns on average.
Strong fundamentals help quality businesses outperform in volatile environments
2.40%
Quality outperformance across volatility regimes
0.50%
0.10%
0.10%
40
Volatility (VIX Index)
Source: Bloomberg Finance LP, Scotia Wealth Management | Quality outperformance measured as avg monthly return difference between MSCI Quality & World.
A high-quality approach should not just be limited to equities – it should encompass the entire
portfolio, including fixed income. Right now, sovereign bond yields are at healthy levels, both in
nominal and inflation-adjusted terms. In the event that economic or market conditions were to
deteriorate, haven flows could drive sovereign bond prices higher, offering capital appreciation
potential in addition to the carry.
Consistent with this thinking, investment grade corporate issuers are much better positioned
than their high yield counterparts, with credit rating trends improving in recent years and an
interest coverage ratio – a measure of how easily a company can service interest costs – that is
about twice as high.
Credit rating upgrade/downgrade
ratio
High-quality issuers are showing improvement in credit quality
2.5
2.0
1.5
1.0
0.5
0.0
2023
2024
Investment grade
2025
High yield
Source: Bloomberg Finance LP, Scotia Wealth Management
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