With the market fixated on whether Britain will remain in the European Union, investors' tendency to assume the worst has produced some distortions in certain sectors of the stock market, according to BMO Nesbitt Burns chief investment strategist Brian Belski.
Fears over a potential Brexit and its implications have intensified in recent days as polls have pointed to the rising likelihood of a vote to leave. Global government bond yields, and, in turn, stock values, have begun to price in that threat.
"We believe an increasingly pessimistic and defensive culture within the financial markets now has most investors hitting the negative conclusion button as a default," Mr. Belski said in a note.
Investors have scurried for the safety of the bond market, pushing U.S. 10-year government bond yields to their lowest since February, British gilt yields to their lowest on record, and German 10-year bunds into negative-yield territory for the first time ever.
As a result, yield-oriented stocks have seen a surge of interest by investors starved for yield elsewhere. The two best-performing sectors in the S&P 500 index year to date are utilities and telecoms, up by 16.3 per cent and 15.5 per cent, respectively.
"We believe that the impact from falling rates has been more than fully reflected for both sectors," Mr. Belski said. "Both these areas are at risk, particularly if there is no Brexit and rates begin to slowly climb again."
He also sees risk in another of the year's outperforming sectors – materials, which have benefited from a commodity rally that could sputter out this summer.
The rise in metals price indexes has been almost entirely driven by China's infrastructure stimulus spending, which has driven steel prices up by more than 60 per cent so far this year, Mr. Belski said.
No such revival, however, has been apparent in more economically sensitive metals, like copper, which has actually declined in price this year, he said.
"Until we see some improvement in growth expectations, we believe base metal prices are unlikely to sustain any rally."