As confidence in the recent upturn weakens, could defensive stocks cash in again?
The brief explosion of investor euphoria at the stock market rebound seems to be fading, with caution taking its place. Markets have powered forwards from their March lows, but many, including our very own Bruce Jackson, are beginning to have doubts.
If the market's recent good run is coming to an end, is now the time for investors to get a little defensive?
Defensively-minded
Fund manager Ignis Asset Management thinks it is. It predicts the next stage of the rally in European equities will be more selective than the last, with many defensive and growth companies better placed to outperform industrial cyclical stocks.
It argues that cyclicals rose "too far too fast" in the recent rally, and now look a little stretched against most economic recovery scenarios.Defensive and growth stocks in the pharmaceutical, technology and telecoms sectors all look better prospects for outperformance.
Those three sectors didn't immediately strike me as naturally defensive, particularly technology and telecoms. But since they are talking about big euronames such as Roche, Novartis, Deutsche Telekom, Vivendi and Telefonica, I can see what they are driving at.
Now that the dash for trash has slowed to walking pace, is now the time for UK investors to make the dash back into defensives?
A friend in need
Defensive stocks certainly missed out on the recent rally, and in many cases went into retreat.
Drinks group Diageo (LSE: DGE) has fallen from around £10 to £8.40 this year, GlaxoSmithKline (LSE: GSK) from £13 to £10, Imperial Tobacco (LSE: IMT) from £19 to £16, and Centrica (LSE: CNA) from around £2.85 to £2.30.
This underperformance is hardly surprising. Investors treat defensive stocks like a dull but worthy friend, a shoulder to lean on in times of trouble, to be carelessly abandoned when life gets racy again.
So inevitably they lost out in the dash for trash, which was about having as much fun as possible before the party ends and the hangover kicks in.
Keep it tight at the back
Now the fun is over, I can see why many analysts are tempted to throw themselves into the comforting arms of defensives again. Especially since many are cheaper than at the start of the year.
This could benefit the FTSE 100, which has a relatively large defensive weighting with sectors such as pharmaceuticals and tobacco compared to its European counterparts.
No defence
But I would first question the use of that word defensive. It doesn't mean safe, or rock solid, given the falls many have suffered in recent months -- and even during the worst of last year's crash.
I would also question whether the word applies to tobacco stocks, given that their cancer-inducing activities have been legislated to death in the West, forcing them to flee to developing lands to keep their business model breathing.
And I can't see the joy in putting long-term funds into classic defensives in the food, utility, tobacco and alcohol sectors.
I can see why they have a practical value for investment managers, who have to keep most of their money invested in the stock market, and shifting to defensives when storm clouds gather can give them a nice cosy feeling.
But any private investor who feels that jumpy about future prospects for stock markets might be better off avoiding equities altogether.
After all, you can't get much more defensive than cash.
On the attack
The ultimate decision will rest on your definition of defensives. If it means underpinning your portfolio with a spread of large, stable, blue-chips such as GlaxoSmithKline, AstraZeneca (LSE: AZN), Diageo, Tesco (LSE: TSCO) and Unilever (LSE: ULVR), then count me in.
But I won't be charging back into defensives, because hopping from one sector to another is no way to run a portfolio.
I also believe that now still presents a great opportunity for investors who believe in the long-term value of stock markets. If you feel the same why, then why be so defensive about it?
In the longer run, I believe the best form of defence is attack.
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