- Defensives are having a historic run. An MSCI index of global consumer staples stocks rose 10.6% in October for its biggest monthly gain since 1998, and its healthcare index gained 9.8%, the second-biggest monthly rise of the century after the start of the Covid pandemic, with both holding those gains in November, the Financial Times reported.
- Tech is on the other side of the trade. An MSCI index of global technology stocks has fallen more than 13% since the start of October, and the Nasdaq 100 is down more than 2% so far in November, as fears that AI spending may not pay off came to a head after Democrats’ sweeping midterm victories raised concerns about a slower data-center build-out.
- US staples are leading. Walmart has risen more than 15% and Procter & Gamble and Coca-Cola are both up more than 10% since the Nasdaq 100 peaked on Oct. 6, while Citi downgraded US and global tech to neutral, with strategist Beata Manthey writing that “credit spreads have risen, earnings revisions have decelerated and AI sentiment has plunged.”
- The rotation may be crowded. Allspring’s Matthias Scheiber warned that defensive sectors “are trading at quite rich valuations now, while some parts of the tech have sold off quite hard,” and healthcare and staples stocks were caught up in selling during last week’s volatility, a sign they are not immune to a broad sell-off.
What Happened?
Investors have been buying stocks they see as protection in a downturn, including consumer staples, healthcare and utilities, which are prized for the reliability of their revenues. “Tech has lost its lustre,” said Guy Miller, chief market strategist at Zurich, adding that investors “are wanting to diversify.” Citi described the rotation as “violent” but said the group could keep outperforming the more cyclical part of the market next year. Pictet Asset Management’s Luca Paolini said the firm was “adopting a more defensive tilt” because of AI financing concerns and higher rates, and Scheiber said tighter monetary policy and persistent inflation prompted him to “lighten up on very aggressive tech exposure.”
Why It Matters?
The shift matters because AI-linked stocks drove most of the market’s gains in recent years, so a sustained move into staples and healthcare would change leadership for US indexes heavily weighted toward tech. First Eagle’s Matthew McLennan said the sell-off is “a reminder that transformative innovation and attractive investment returns are not necessarily the same thing,” and expects investors to seek out overlooked areas with more reasonable valuations. The rotation has also favored Europe, where the Stoxx Europe 600 is up 1.5% in November thanks to its heavier weighting toward defensive sectors. But with defensives now expensive, the trade depends on tech weakness continuing.
What’s Next?
Monday’s session showed how quickly sentiment can swing: the S&P 500 rose 2.35% for its best day since April 8 and the Nasdaq Composite gained 2.74% as chip stocks rebounded, according to CNBC. Investors will watch whether staples and healthcare hold their October gains if that rebound in tech continues, and whether earnings revisions for tech keep slowing. Higher rates and inflation data will also shape the trade, since persistent inflation has been one reason managers cited for trimming tech. Scheiber cautioned that the strategy could be “prone to reversals in sentiment.”
Affected Tickers and Coins: WMT, PG, KO, XLP, XLV, QQQ
Source: Financial Times, CNBC
