Rising rates are adding new risks to equity markets. Stocks of companies that are saddled with debt have underperformed recently. And leverage is especially high in sectors widely seen as safe havens.

Historically low interest rates have been the norm for more than a decade. When borrowing was so cheap, investors paid relatively little attention to company debt levels. But things are changing.

Our research shows that stocks of companies with high debt ratios underperformed low-leverage stocks in the US, Europe and Japan during the first quarter (Display). Some heavily indebted sectors such as utilities, real estate and consumer staples actually have the lowest beta, meaning they tend to fall less when markets decline and are perceived as relatively safe. In contrast, riskier sectors with beta above the market (greater than 1.0), such as technology and financials, have negative debt positions because they are well capitalized and flush with cash.

Maybe it’s time for investors to abandon the old safety playbook and rethink what defines a risky stock. Beta alone tells a partial story. Investors who seek protection from market volatility in “safety” sectors may find themselves exposed to new risks from rising rates.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.

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