Global defensive sector funds are in demand from investors as concerns about a slowdown in the US economy forces them to seek assets such as consumer staples and utilities stocks that can withstand weakness in labour markets and commodities.
According to LSEG Lipper data, defensive sector funds such as consumer staples and utilities attracted substantial inflows of $1.43 billion and $1.06 billion, respectively, over the last two weeks. In contrast, sectors such as technology, financials, and industrials experienced significant outflows, totalling $2.97 billion, $1.38 billion, and $540 million respectively.
Over the past month, the MSCI Consumer Staples index has seen a notable increase of 3.92%, significantly outpacing the 1.35% gain of the MSCI World index .
Why it’s important
This shift in trend could diversify the market rally, as defensive sectors such as consumer staples and healthcare were previously sidelined in favour of growth-oriented sectors such as tech and artificial intelligence.
Context
U.S. manufacturing PMIs showed factory activity continued to contract in August, while employment reports suggested the labour market cooled.
Some analysts believe that mere rate cuts may not adequately offset the decline in corporate profits or market uncertainties, if the economy is moving towards a recession.
Since the start of September, defensive sectors have emerged as market leaders in response to increasing signs of an economic slowdown, said Rob Anderson, U.S. sector strategist at Ned Davis Rsearch.
However, he said: “If stocks rally post-election as uncertainty lifts and seasonality turns more favourable, cyclical sectors could once again gain the upper hand.”