From headwind to storm! Rotate further into Defensives

From headwind to storm! Rotate further into Defensives

The support to risk assets is still eroding, and our risk allocation Rule is now suggesting double underweighting of Risk assets like LQ Credit and Equities (see p.3)

• The four headwind factors that are likely to turn into a storm in the coming weeks and months are 1) Soaring inflation and input prices and a supply-driven slowdown. 2) GDP slowdown transformation: From a supply-constrained economic cooling to ‘demand destruction’ in H1 2022. 3) A sudden drain-out of liquidity, including restrictions on the supply of credits 4) Profit margin squeezing, likely to make Q1 and Q2 very weak quarters for global corporate earnings. See Charts p.4-7

• CAP’s Defensive Factor has outperformed global stocks by a solid 14% since 2022 (p.9). Defensives have so far in 2022 offered direct positive return and hence negative correlation to global equities.

• Although Defensives have outperformed the global stocks market since Q4 2021, we anticipate that this will continue for a while. Defensives could, in our view, outperform Global equities by another 15% (see p.10)

• This is not uncommon and may continue in the coming months (see p.11). As the allocation options in Fixed income are limited (see, Defensives offer another way to hedge your overall equity and Low- Quality Credit exposure.

• Our favorite Defensive industry continues to be Pharmaceuticals. But we are now also raising our stakes in Telecom, Consumer Staples, and Utilities. So, our DREX scorecard is here, our guide (see p.12)

• On p.13, we have gathered a list of Defensive stock picks that we find offer both quality and upside potential.