DEFENSIVE SECTORS

Summer, the vacation period, lies ahead. It is not disregarded by employees of investment funds which traditionally decrease their activity in summer, either. This calm results in a prevalent ranging condition of the market. How should one trade at a time like this? Where should one invest?

It is common knowledge that successful investment is not limited to just finding a strong company. One needs to be aware how the market behaves, understand how certain sectors will behave in a certain market phase, what factors affect price movement. For example, GDP growth rates have a certain influence. Their decrease serves as an important negative factor that strongly affects the dynamics of the stock market. Investments in cyclic sectors of the economy are highly risky in such periods.

Making a portfolio of stocks that are part of the so-called ‘defensive’ sectors could be the wisest decision for the summer period. These include producers of items that are in consistent demand. These securities are especially topical during the periods of market instability in that they provide protection from a deep drawdown during the decline phase. When looking at these investments from the reward-risk point of view, defensive shares demonstrate low yield compensated by their stability and lower exposure to negative factors. During market growth periods they most often lag behind but fall much less during a decline.

Such sectors as health care (XLV), utilities (XLU) and consumer staples (XLP) are defensive. Let’s compare the dynamics of the ‘defensive’ consumer staples and the energy sector.

It is obvious from the chart that the resistance at $33 for the ‘defensive’ sector served as a springboard for further growth, while energy started correcting. A similar situation may be one of the signs of a change in the tendency at the stock market. Investors try to withdraw capitals from risky assets and invest them in more stable securities.

Now let’s look at yield figures of securities in the defensive and cyclic sectors for the past 13 weeks.

The charts suggest that the yield of cyclic shares is below the market average, and that of the ‘defensive’ securities is, on the contrary, above and marked by a rising tendency. A similar situation is now happening in all ‘defensive’ sectors.

It is hard to overestimate the importance of defensive sectors. Investments in securities in these sectors are quite a reliable protection of money in conditions of instable markets.

In conclusion, we would like to note the overall market yield and point out that one should not long in any of the sectors if there are strong signs of a total fall.

Materials provided by the Portfolio Investments Department