Equities: Defensive rotation with higher yields – Danske Bank

Danske Research Team reports a marked drop in global equities, with the S&P 500 and Stoxx 600 down 0.7% on Tuesday. After a period of value-versus-growth rotation, flows shifted toward defensive sectors such as consumer staples and health care, funded by cyclicals. They expect more defensive outperformance ahead as higher yields raise rollover risks in already elevated leading indicators.

Defensive sectors gain relative strength

"Equities were markedly lower on Tuesday, with the S&P 500 and Stoxx 600 both down 0.7%. Investors have so far digested higher yields largely through a classic value-versus-growth rotation."

"European banks have outperformed real estate by 7pp since long-end yields began rising meaningfully about a month ago. Yesterday, however, the rotation shifted towards a more traditional defensive preference."

"Investors bought sectors such as consumer staples and health care, funded by cyclicals, such as tech, industrials and materials, all of which were down 2-3%. Futures are continuing lower this morning."

"This kind of defensive rotation is what we expect to see more of going forward, as outlined in last week's Equity and Cross-Asset Strategy report."

"Higher yields revive the risk of a rollover in leading indicators, which are already more prone to a rollovers, simply as they sit on elevated levels. Such a rollover would normally be accompanied with defensive outperformance."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)