Quick Bites | Time to Play Defence?

It’s been a week or two since the global mini-panic that sent markets tumbling and the VIX soaring for a few days. With the dust now starting to settle, equities have more or less recovered a good portion of what they lost. But that does not mean we can simply forget it happened.

Indeed, it provided a bunch of lessons: 1). Markets are vulnerable as “the narrative” can pivot very, very quickly; 2) Hedge funds have hundreds of billions of dollars of bets in every corner of the world, and 3). Super-expensive stocks can get trashed overnight.

As we approach the seasonally weak September/October period, it might be a good time to get a little more defensive. While the worst of the volatility spike is hopefully behind us, we could see further downside for equities on rising geopolitical tensions, uncertainty around the US election, investors questioning the soft-landing narrative, and inflation numbers remaining volatile. 

Apart from Cash and Gold, if you want to maintain exposure to equities, now might be a good time to rotate into “defensive” sectors.

Defensive stocks (such as Consumer Staples, Utilities, REITs, and Healthcare) have a habit of outperforming when the market falls. They are typically reliable dependable businesses, often with mature and stable cash-flows that are meant to tick along no matter what the economy is doing. That means they lag and underperform when everything else is running hard but serve as an important portfolio buffer in a downturn.

Whatever your view is on the current correction, Defensives on the US market look interesting: 

• They are trading at the third cheapest point since 1973 on a relative value basis.
• Investor allocations are ticking up from record lows.
• Technical factors are starting to turn up (relative performance, breadth).
• We are in the middle of a seasonally strong time for defensive assets (up to November).

On the downside, if Defensives are going to outperform, then that means that the rest of the market will be under-performing. Something to think carefully about as you reassess your portfolio…

Source: Topdown Charts