Investors have been buying up stocks they believe can protect them in a market downturn, as fears that the AI bull market may be over prompt a violent rotation in global equities. So-called defensive equity sectors such as consumer staples, healthcare and utilities — favoured in times of uncertainty for the reliability of their revenues — have soared in recent weeks. An MSCI index of global consumer staples stocks posted its biggest monthly gain since 1998 in October, rising 10.6 per cent, while last month marked the second-biggest monthly gain of the century for its healthcare index at 9.8 per cent, outstripped only by the start of the Covid pandemic.
Both sectors have held on to those gains during November so far. In contrast, an MSCI index of global technology stocks has fallen more than 13 per cent since the start of October. Tech has lost its lustre, said Guy Miller, chief market strategist at Zurich.
People are wanting to diversify and this has been driving the rotation into staples and other parts of the market, he added. AI-related stocks, which propelled global markets higher in recent years, stumbled in October as investors fretted that vast spending on AI infrastructure might not generate the expected profits. These fears came to a head last week after the Democratic Party secured resounding victories in the US congressional midterms and gubernatorial elections.
That triggered a sharp sell-off in global tech stocks, driven by fears that the party would seek to slow the pace at which AI data centres can be built. Meanwhile, among strongly performing defensive stocks, Walmart has risen more than 15 per cent and Procter & Gamble and Coca-Cola are both up more than 10 per cent since the tech-heavy Nasdaq 100 peaked on October 6. Citi analysts said the rotation into defensives has been violent but added that this group of stocks could keep outperforming the more cyclical part of the market next year.
Credit spreads have risen, earnings revisions have decelerated and AI sentiment has plunged . . . especially as a result of the US midterms, wrote Beata Manthey, head of European equity strategy at Citi, in a note to clients on Monday, explaining the decision to downgrade their recommendation on US and global tech stocks from bigger than benchmark to neutral. Matthias Scheiber, head of multi-asset investing at Allspring Investments, said this year's global tightening of monetary policy as well as signs of persistent inflation prompted him to lighten up on very aggressive tech exposure and add more defensive equities. Luca Paolini, chief strategist at Pictet Asset Management, said the firm was adopting a more defensive tilt in its equity exposure because of AI financing concerns and higher rates, moving into less cyclical sectors such as healthcare.
The boost to defensive stocks has helped European indices remain resilient during the tech sell-off, given their greater exposure to those sectors compared with the US market. Citi's Manthey upgraded her recommendation on European ex-UK stocks on Monday, given Europe's lighter tech exposure. The Nasdaq 100 is down more than 2 per cent so far in November, while the Stoxx Europe 600 is up 1.5 per cent.
As volatility grew last week, healthcare and staples stocks did get caught up in the selling, with some in the market seeing this as a warning signal that defensives could also be vulnerable to a sharp sell-off. Allspring's Scheiber said that while owning defensives and betting against tech stocks had been a profitable strategy over the past couple of weeks, this could be prone to reversals in sentiment. Defensive sectors are trading at quite rich valuations now, while some parts of the tech have sold off quite hard . . .
It can work both way...
Source: Financial Times Markets · Summarized by HeadlinesBriefing