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Wall Street: Trade policy uncertainty could bolster U.S. defensive stock sectors

Reuters  |  NEW YORK 

By April Joyner

(Reuters) - As the ramps up import tariffs and long-date U.S Treasury debt yields remain low, stocks in so-called defensive sectors may have room to run higher in price, even though expectations for the currently quarterly earnings seasons are high.

Stocks in defensive sectors, which generally pay steady dividends and have steady earnings, languished for the first months of 2018. Utilities, real estate, and consumer staples all saw their stocks fall into early June even as the U.S. benchmark 500 index rose more than 4 percent.

But over the past 30 days, two of those sectors have led the 500 in percentage gains as geopolitical risk has risen.

Utilities have jumped 7.7 percent, and has gained 3 percent. Not far behind, consumer staples have risen 2.5 percent. All have outperformed the S&P's 0.4 percent advance.

By contrast, shares in several cyclical sectors, which tend to rise as the grows and are often favored by investors in the late stage of a bull market, have dropped over the same period. Industrials have slumped 3.9 percent, while materials have slid 3.6 percent and financials have fallen 2.7 percent.

Several conditions have supported a rotation into defensive stocks, investors said.

They tend to perform better when interest rates are low, and they have risen as yields on the 10-year Treasury note have retreated from the 3.0 percent mark since early June.

A burgeoning U.S. trade war with and the has also led investors to seek stability. On Tuesday, the proposed 10 percent tariffs on an additional $200 billion worth of Chinese goods.

Consumer staples stocks also got a boost on Monday after reported better-than-expected quarterly results.

Seven out of 25 of the 500 consumer staples companies have reported so far, and of those, 86 percent have beaten estimates for revenue and profit. Generally, staples and other defensive areas lag the other S&P 500 sectors in revenue and earnings growth.

Some market watchers have begun to recommend portfolio adjustments in anticipation of a downturn in U.S. stocks.

On Monday, Morgan Stanley's U.S. equities strategists upgraded consumer staples and telecom stocks to an "equal weight" rating, after raising utilities to "overweight" in June. They downgraded the technology sector, which accounts for more than a quarter of the weight of the S&P 500, to "underweight."

"We expect the path to be bumpy for the next few months," said Keith Lerner, at in Atlanta, which in May added exposure to stocks in one of its portfolios. "Having some dividend strategies is likely to be a nice ballast."

Few investors believe the end of the bull market is imminent though.

Some said the gains in defensive sectors are bound to be short-lived as strong corporate earnings and continued economic strength boost market sentiment. Others believe recent tensions between the U.S. and over trade policy will be resolved by the autumn as the U.S. midterm approach.

"We have solid earnings growth, and we have an that continues to march down the path of acceleration," said Emily Roland, at in "Those (defensive) sectors are not attractive to us."

Even so, defensive sectors could draw investors' attention in the next few months if stock markets remain choppy. As they have languished in the past few years, stocks in those sectors could offer value, especially if the companies raise dividends, said Kate Warne, strategist at in

The improving performance of stocks in defensive sectors may ultimately be beneficial for the market, some investors said.

The lion's share of growth in the S&P 500 index has come from technology and consumer discretionary stocks: most notably, Facebook Inc, Inc, and parent company Alphabet Inc, collectively known as FANG.

If other sectors can contribute more to the index's gains, investors may have more confidence in diversifying their portfolios.

"With a very narrow market like you've had most of this year, it's great for stock pickers, but it's hard for indexes to make money," said Robert Phipps, a at Per in Austin, "What you're seeing is a broadening out of the market, which is extraordinarily helpful."

(Reporting by April Joyner; Editing by Alden Bentley)

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Fri, July 13 2018. 16:52 IST