The rally may seem like a run for defensive plays rather than a risk-on roar, and investors may be excited with the gains this week.
A Goldman Sachs Group Inc. index of defensive stocks, including healthcare and tech, has climbed to more than an 18 month high relative to the MSCI AC World Index, because fears of a global recession outweighs concern over sky-high inflation. The gauge has jumped over 4% this week, double the rise in the global stocks benchmark - it is on track for its first weekly gain in four years.
The implications of a Federal Reserve hike that seems willing to hike the world's largest economy into a recession are beginning to be considered by investors. Chair Jerome Powell has called his commitment to curbing price rises unconditional, giving a boost to havens like Treasuries this week and giving a boost to defensives to outperform.
The heightened volatility in the markets has forced investors to seek stability, said Manish Bhargava, a fund manager at Straits Investment Management in Singapore. He said that utilities and healthcare that have the highest potential Sharpe ratios could continue to trade well, as well as a measure of risk relative to returns.
The fall in bond yields has helped defensive growth stocks, which had been under pressure due to the rise in interest rates undermining valuations.
In Asia trading on Friday, stocks with defensive factors such as growth and profitability outperformed riskier or economically sensitive ones like leverage and value. The US defensive stocks had a strong session on Thursday, a gauge that jumped 2%, while its cyclical peer closed lower.
A stronger positioning in defensives and a growing fear of a slowdown also suggests that markets may struggle in the near term, especially cyclical stocks that tend to benefit from a strengthening economy. Despite the recession concerns, the forward earnings for global stocks are just a fraction off their recent highs.
Equity funds are seeing their biggest outflows in nine weeks. The Bank of America Corp. said that the US stocks saw their first outflow in seven weeks at $17.4 billion in the week through June 22, with $16.8 billion exiting in the week.
The investors are shifting their focus from rate risks to EPS risks. Robert Buckland, strategists for Citigroup Inc., wrote a note on Thursday that it may take some pressure off growth stocks, but it is troublesome for cyclicals. Defensive value is desirable. The Age of Credibility for Central Banks is no longer over.