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Global Equities: Playing Defense

  • Global "Defensive Value" sectors are attractive from a long-term valuation perspective and a near-term technical view

  • This super-sector tends to outperform during corrections and bear markets

  • Seasonality favors an overweight to safety plays


Volatility kicked up last week with the VIX spiking to near 25. The Russell 2000 VIX soared to above 30 before settling in the mid-20s. It’s that time of year for volatility to show itself. It’s also a period during which defensive assets tend to outperform risky securities.


A Risk-Off Indicator


The Weekly Macro Themes report dives into the price action and trends within Defensive Value stocks. It’s a space comprised of Healthcare, Consumer Staples, and Utilities. Traders should take notice of positive relative price trends in this super-sector. While not a completely risk-off indicator, it’s a potential warning for the bulls to monitor.


Breakout Watch


Our featured chart compares Global Defensive Value versus the MSCI All-Country World Index (ACWI) since 2015. The super-sector outperformed during the COVID crash but were then left in the relative dust of the broad equity market’s rally through early 2021. It’s been a sideways-trade for the better part of this year before this recent uptick in defensives. Further relative gains would confirm a technical breakout.


Featured Chart: Defensive Value Ticks Up Relative to Global Equities


chart of defensive value relative performance diversifier


Adding Tactical Alpha


Defensive Value tends to outperform during significant corrections and bear markets (as seen during the stealth bear market of 2015-2016 and significant correction in late 2018). US Defensive Value has shown relative strength versus the S&P 500 from May through mid-October with a pronounced surge starting in early September in data going back to 1973. So this is a niche of the equity market you should monitor if you’re looking to add alpha in the near-term.


Valuation, ETF share, and Market Weight


Beyond the seasonal play, long-term valuations are attractive. 2021 has benefitted growth sectors, leaving US Defensive Value with a valuation discount of more than 20% to the S&P 500. (The steepest discount since the dot com bubble).


Positioning is also light as one might imagine—ETF market share for the three sectors fell to less than 30% which matches the nadir from early 2011. In the US market, Healthcare/Utilities/Staples together now make up less than a quarter of equity market cap after hovering near 30% in the early to mid-2010s. As the market cycle progresses, there might be a gradual increase in exposure among investors to the super-sector.


Sector Analyses


Let’s take a closer look at the three components starting with Healthcare. Investors know that Healthcare is one of the most difficult sectors to analyze because of the mix of safe stocks like J&J, Pfizer, and Merck but then speculative Biotechs are tossed in as well. Still, we find that it’s the standout sector within Defensive Value. Its relative valuation has bounced off historic lows while price shows relative strength this year with a recent technical breakout.


Staples remain in a relative downtrend, helping to push down the group’s valuation versus the market to 20-year lows. Price-action has also been weak, though Staples’ downward momentum is slowing.


Finally, Utilities are the new hot momentum trade in case you missed it. Among the 11 sector funds, XLU has been the best in the last month. Longer-term, Utilities trade at their cheapest relative valuation since the early 2000s.


Bottom Line: There’s a strong long-term strategic case to consider an overweight to Defensive Value. The near-term technical picture is also taking shape. Traders should keep this super-sector on watch as we continue through seasonal equity market headwinds.


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