What this chart shows
This chart shows the cumulative performance of defensive equities, here approximated using the MSCI World Minimum Volatility Index, and of the market-cap weighted global equity index, since the end of 2021. Defensive stocks, present across all industries but most readily identifiable within financials, health care, real estate and infrastructure typically exhibit low share price volatility, thanks to their “bond-like” features of stable earnings generation, low reliance on the business cycle and predictable growth rates. Some people call them “boring” because they have nothing to do with the exciting world of technologic innovation; they rarely surprise investors with great earning revisions; and they rarely make the front page. Since 1 January 2022, defensive stocks have underperformed by about 8%, despite having outperformed by almost 9% in the sell-off in early 2022.
Why this is important
Over the long-run, one can expect defensive stocks to deliver equity-like returns with bond-like volatility, but over the short-term they can easily deviate from broader equities by a significant amount, often (but not necessarily) lagging in a strong rally and outperforming when markets fall. Since mid-2022, the rising interest rate environment has punished them for their bond-like characteristics, and the absence of any relation to AI (the dominating theme over the past two years) has made them even less attractive, leading to substantial underperformance and a significant relative discount against market-cap weighted equities. Now that the tides are turning, with rates coming down and excitement around AI dissipating, we think this is a very attractive part of the market that should outperform if things continue on this trajectory, especially should global growth slow.
In the week ending 11 October global central banks took varied approaches to balance inflation and economic growth, reflecting diverse economic conditions
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Major stock indexes edged back from record highs
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The Federal Reserve’s recent rate cut has investors closely watching inflation and jobs data
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Treasury yields remained volatile, with the 10-year note yield fluctuating around 4%
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Crude oil prices rose, recovering from early-week losses
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The Bank of England maintained its interest rate stance amid ongoing inflation concerns
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The pound strengthened slightly against the dollar, reflecting market confidence
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Retail sales showed a modest increase, driven by consumer spending on essentials
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The UK housing market saw a slight uptick in activity, despite broader economic uncertainties
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The European Central Bank introduced a new timulus package aimed to support struggling economies in the Eurozone
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Inflation in the Eurozone remained high, prompting further ECB intervention
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Germany reported a decline in industrial production, raising economic concerns
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The Euro strengthened against major currencies following the ECB’s announcement
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China’s manufacturing sector showed signs of recovery with a slight increase in the PMI
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Export growth slowed, reflecting global economic uncertainties
The Chinese yuan remained stable against the US dollar, supported by central bank interventions
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The Bank of Japan kept its ultra-loose monetary policy unchanged to support economic recovery
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The yen weakened against the dollar, reflecting the BOJ’s continued accommodative stance
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Brazil’s central bank cut interest rates to stimulate economic activity amid slowing growth
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South Africa reported higher-than-expected inflation, raising concerns over potential rate hikes
