The market meltdown unleashed by the new coronavirus pandemic has been exceptional in many ways. Investors seeking to bolster defensive positions in portfolios should take a closer look at the performance of specific subindustries, which in some cases has diverged from historical patterns.
Most steep market corrections have been caused by bursting bubbles, such as excess credit or capacity, or by inflation. But the current bear market has been triggered by an exogenous shock. The speed of the crash is virtually without precedent, with volatility spikes surpassing even the extreme levels seen during the global financial crisis.
While the sell-off was broad based, the performance of many sectors was surprising. For example, global real estate and utilities stocks have traditionally been defensive in 10 previous crises that we analyzed. But in the coronavirus sell-off, they haven’t offered the level of downside mitigation they normally do. In contrast, some technology industries have held up much better than in previous severe drawdowns.
Past Crises Don´t Offer Much Guidance
Why has real estate disappointed? It’s possible that rising unemployment is putting additional pressure on many already struggling retail tenants. And companies with heavier debt burdens have been especially punished during this period, which has affected real estate as well as another typically defensive sector, utilities. But the biggest detractor, both in absolute and relative terms, has been consumer services; the unprecedented lockdown measures triggered a collapse in consumer spending, and particularly hit many business models that rely on human interaction, like travel, restaurants, casinos and conventions.
Meanwhile, technology hardware and equipment have held up better than expected, as companies improve their IT infrastructure to cope with remote workers. Pharmaceuticals and biotech, a classic defensive sector, have done exceptionally well this time, as investors anticipate much more spending on medical preparedness in the future. Stronger balance sheets were also helpful in these sectors.
Changes to consumer and corporate behavior are happening at an unprecedented pace. As a result, stocks are behaving differently, too. Equity investors looking to position for the challenging times ahead must adopt a dynamic approach to protecting portfolios, in our view, by rethinking the defensive attributes of stocks and searching for resilient companies in unexpected places.
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