Investors huddle in defensive corners of US market

Slowing growth and trade fears boost real estate, utilities and consumer staples.

  • By Richard Henderson,
  • Financial Times
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The US stock market is on course for its best year in decades, with a 20 per cent year-to-date gain for the S&P 500 (.SPX).

However, over the past 12 months — which includes the sharp fourth-quarter sell-off — gains in the index are a lot more modest, at just 6 per cent. More tellingly, three of the four best-performing sectors over that period are the most defensive corners of the market, where investors tend to turn when things are about to get tougher.

Real estate, utilities and consumer staples have outperformed all other sectors except communication services over the past year as investors navigate slowing economic growth and concerns over further trade tariffs.

“Investors are getting more cautious,” said Rob Almeida, global investment strategist for MFS Investment Management, a Boston-based group with $489bn in assets under management. “They are repositioning away from companies that are not sustainable earnings compounders, and into companies that are more consistent.”

Expectations that the US Federal Reserve will cut interest rates in the coming week should give a boost to risky assets such as equities. But the limits of this support may be weaker than many hope.

Defensive stocks have typically outperformed cyclical ones when the Fed has cut, as investors respond to the weaker economic trends guiding central bank easing, rather than the cheaper access to credit, according to Goldman Sachs analysis.

Should the Fed cut rates as anticipated, “we would expect defensives to repeat the historical pattern and outperform if economic data remain weak enough to motivate an extended Fed easing cycle,” the Goldman analysts said.

Persistent growth concerns and the memory of the market ructions in December has spooked investors into maintaining a defensive posture, said Mr. Almeida.

“In 2008, the market was caught completely off guard,” he added. “Equity investors are thinking, ‘I won’t let that happen to me this time’.”

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