Speaker: Mislav Matejka, CFA, Head of Global Equity Strategy
After a prolonged spell of weakness, at first driven by the inflation and bond yields spike last year, and then this year by macro recovery trade, certain Defensives are starting to trade a bit better of late. We think that Defensives could catch a more sustained bid if: 1. Bond yields could be in the process of peaking out, we reiterate the call from last month that one should go long duration. If the turn lower in bond yields is confirmed, on the Fed being done, a continued move down in inflation, but also on softer activity indicators, as seen in disappointing PMIs, then a range of Defensives should benefit. There is a clear link between bond yields and Utilities. Long bonds have lost half of their value over the past 3 years, as did Utilities relative, and that could be turning. Now, even if bond yields ramp up further, the trade might be on. Any break in yields above 5% will, in our view, be taken negatively by the market. In that scenario, Defensives might not behave as they did in August-September, when they underperformed against the backdrop of rising yields, but could be seen more as a traditional low beta part of the falling overall market. 2. Global output PMIs have been weakening for 5 months now, both manufacturing as well as services, and the risk is of a move into outright contraction. Money supply trends suggest that there could be more downside. 3. Earnings of Cyclical sectors are elevated vs Defensives, and are showing signs of a turn. In the latest reporting season, Cyclicals - Discretionary & Industrials had the most profit warnings, and Utilities the least. 4. Valuations of Defensives are not demanding anymore, having de-rated from outright expensive territory to fair value currently. Within Defensives, we have a preference for Utilities (OW), Telecoms (OW) and Staples (OW), and have recently upgraded Healthcare and Real Estate post the big spell of weakness.
This podcast was recorded on 12 November 2023.
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