Traders have ploughed into tobacco and pharmaceuticals stocks at the fastest rate since the Lehman Brothers crash, as part of a wider move towards “safe haven” investments.
Cyclical stocks such as restaurants, airlines and luxury clothing retailers have fallen out of favour amid soaring inflation, rising interest rates and the war in Ukraine.
“There has been a material rotation towards defensives and away from financials and cyclicals,” fund manager JO Hambro told investors in its UK Equity Income Fund.
The ratio between cyclical and defensive stocks has fallen well below levels witnessed throughout the Covid pandemic.
“The valuation between defensives and cyclicals is now at the same extremity as it was after 9/11 and during the Lehman collapse in the financial crisis,” JO Hambro investment managers James Lowen and Clive Beagles wrote.
Western central banks are battling to mitigate the threat of double-digit inflation as Russia’s invasion of Ukraine places upward pressure on energy prices.
Last week the US and UK both increased interest rates. The Federal Reserve confirmed its biggest rise in 22 years and the Bank of England announced a rate increase from 0.75pc to 1pc, the highest level since 2009. Gold prices fell as the US dollar rallied.
But investors are increasingly on the lookout for safer equity investments.
Stewart Cook, co-head of European markets at Berenberg, said investors have been “switching out of the more highly valued growth stocks” that outperformed during the era of ultra-loose central bank policy and Covid into more defensive shares, such as energy and consumer staples.
He added: “The move to defensive stocks has been exaggerated by the situation in Ukraine, both in terms of defence stocks, like BAE, but also with the rise in energy prices and commodity prices the likes of BP and Shell. These names were previously underowned due to ESG concerns that had dominated investors’ thinking.”
The pivot into defensive stocks, which do better in times of market strife, has helped the FTSE 100 outperform every other major stock index this year. While European, Asian and US stocks are nursing heavy losses in 2022, London’s blue-chip index is up 1pc as energy, mining and defence shares have surged.
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