B of A Securities’ widely-read monthly survey of global portfolio managers uncovered health care, the United States, commodities, technology and cash as the biggest current overweights relative to the historical averages. One of these – commodities – is not like the others.
The other four asset classes – cash being the most obvious example – are defensive in one way or another. Health care stocks are among the least sensitive to the pandemic-related economic slowdown so that sector has defensive qualities.
Technology stocks are generally expensive and may not seem defensive at first glance. However, Credit Suisse Jonathan Golub noted that the current situation bears little resemblance to the heights of the late-1990s technology bubble.
The largest five tech companies make up 22 per cent of the benchmark now, a larger proportion than the S&P 500′s largest five formed before the tech bubble burst (18 per cent). But, the current top five make up a far larger percentage of overall index earnings growth – 14 per cent versus 9.3 per cent. Relative to the benchmark, the big five now generate far larger earnings growth.
Apple Inc., Microsoft Co., Amazon.com Inc., Alphabet Inc. and Facebook Inc. will never be confused with deep value stocks. However, as the most dependable source of market-beating profit growth, they also have defensive aspects.
Regionally, the U.S. is where global portfolio managers park assets when they’re nervous, which is why the U.S. dollar tends to rise along with the CBOE Volatility Index. American equity and bond markets are the most liquid and diversified so, relative to emerging markets and the rest of the G-10, are viewed as a safe haven.
Commodity prices aren’t defensive at all. They’re volatile and entirely dependent on an uncertain global economic future.
China, as the first economy to work through the initial stages of the COVID-19 outbreak and the source of about half of global demand for most major commodities, is clearly boosting optimism in resource sectors.
The resurgence in commodity demand will have to spread beyond China for the portfolio manager overweights to pay off significantly. The second wave of U.S. COVID-19 dispersion in the U.S., for instance, is a threat to continued rallying in commodity sectors.
The fund manager bullishness on resources is a non-defensive anomaly that likely signals an initial market gamble on the post-pandemic economy. A sustained rally in commodity prices would encourage investors into other cyclical sectors like industrials and consumer discretionary, so resource prices remain an important indicator to follow in the weeks ahead.
-- Scott Barlow, Globe and Mail market strategist
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Compiled by Globe Investor Staff