Wall Street: Defensive stocks top 2019 playbooks
NEW YORK Perceived safe havens like utilities and consumer staples, often an afterthought in Wall Street's cascade of year-ahead investment recommendations each December, are emerging as top picks as stocks limp into the new year.
Growth-oriented sectors like tech or communications services have typically dominated year-end round-ups of investment ideas. But an uncertain economic outlook and concerns that the bull market's roar is morphing into a bear's growl have more Wall Street banks telling investors to play it safe.
A Reuters analysis of 2019 outlooks from 10 major financial institutions found eight, including Morgan Stanley, Goldman Sachs and Barclays, with "overweight" ratings on at least one defensive sector for next year. That is a big change from last year, when only two of those banks favoured defensive sectors.
Bank of America Merrill Lynch, for instance, has moved its rating on utilities to "overweight" from "underweight".
"Utilities offering 6 per cent to 8 per cent total return with a lower level of risk might actually be a good place to be in an environment where volatility is rearing its head," Ms Savita Subramanian, the bank's head of US equity and quantitative strategy, said during an outlook call.
The lack of analyst love for defensive sectors over the years is understandable. Appreciated more for their rich dividend yields than share price gains, the utilities and consumer staples sectors have turned in relatively yawn-worthy performances during the long bull run since the March 2009 market bottom.
Utilities and staples are up 135 per cent and 160 per cent, respectively, versus the S&P 500's 268 per cent gain. The tech sector has jumped 441 per cent and consumer discretionary has soared 513 per cent.
But defensive sectors have held up reasonably well for the past three months while the market has crashed around them.
Nasdaq is now in a bear market, having slid more than 20 per cent from its record high in late August, and the S&P 500 earlier last week was just a stone's throw from bear territory.
In recommending defensive sectors, many strategists cited decelerating US and global economic growth and the potential for higher market volatility.
And geopolitical issues such as US-China trade tensions and Brexit could continue to weigh on US equities, investors said.
However, US President Donald Trump offered investors a ray of hope that the new year may offer less volatility when it comes to China, tweeting on Saturday that "big progress" was being made towards a possible trade deal between the two countries.
Defensive sectors may also benefit from an expected slowdown in the pace of Federal Reserve interest rate increases in 2019.
Because of their higher dividend yields, defensive stocks are seen as bond proxies and do poorly when interest rates and bond yields rise, as they were through much of this year.
But the Fed is now seen throttling back on rate hikes, and benchmark 10-year Treasury yields have retreated to around 2.75 per cent, down by roughly half a percentage point from an early November high.
Some investors argue it is too early to jump into defensive sectors with economic and earnings growth expected to continue, albeit at a slower pace. Safe havens are also looking pricey relative to growth stocks.
Still, even some optimistic strategists say a sector allocation shift is warranted. - REUTERS