Sunday, July 29, 2012

Defensive stocks becoming overvalued

The Russell 1000 Defensive Index touched a multi-year high on Friday, while the Morgan Stanley Cyclicals Index continues to lag (discussed in this post). The performance gap over the past two years is now 20%, showing an ongoing defensive posture of US equity investors.

US equities: defensive vs cyclical (including dividends; click to enlarge)
 (source: Bloomberg)

As with other defensive asset classes such as USD or US Treasuries, defensive US equities are potentially becoming a "crowded trade". Barclays' Sector Rank Index shows defensive stocks significantly overvalued relative to cyclicals and the overall equity market.

Source: Barclays Capital (click to enlarge)
Barclays: - A crowded trade. Our chart of the week shows that the defensive sector trade in the US is at prior peak levels. We are not convinced we’ve seen the bottom in equity markets but would be prepared to exit these “high-flying” sectors on improvements in the macro environment. In anticipation of any such unwind, our Data Miner highlights defensive stocks that have significantly outperformed, and are trading at premium valuations vs the overall market and their sector peers
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