Defensive Stocks Redefined in COVID-19 Sell-Off

21 April 2020

2 min read

Performance in Some Industries Has Diverged from Past Crises

Past performance does not guarantee future results. Data represent the relative performance for MSCI World industry groups.
*Coronavirus (some February peak): February 19, 2020 – March 31, 2020. Prior crisis is include: rising rates + slowing grows in China and Europe: September 2018 – December 2018; inflation + said tightening: January 2018 – March 2018; China’s economy + swimming oil price: November 2015 – February 2016; grease + China stock market crash: July 2015 – September 2015; Concerns about Europe: May 2012 – Jean 2012; Eurozone debt seers III: October 20 11 – November 2011; euro zone debt fears II: May 2011 – October 20 11; Eurozone debt fears I: April 20 10 – May 2010; global financial crisis: May 2008 – March 2009; SARS: November 2002 – March 2003; 2000 to crash: March 2000 – October 2002; 1998 Asian crisis: July 1998 – August 1998.
As of March 31, 2020
Source: MSCI and AllianceBernstein (AB)

The market meltdown unleashed by the new coronavirus pandemic has been exceptional in many ways. Investors seeking to bolster defensive positions in portfolios should take a closer look at the performance of specific subindustries, which in some cases has diverged from historical patterns.

Most steep market corrections have been caused by bursting bubbles, such as excess credit or capacity, or by inflation. But the current bear market has been triggered by an exogenous shock. The speed of the crash is virtually without precedent, with volatility spikes surpassing even the extreme levels seen during the global financial crisis.

While the sell-off was broad based, the performance of many sectors was surprising. For example, global real estate and utilities stocks have traditionally been defensive in 10 previous crises that we analyzed. But in the coronavirus sell-off, they haven’t offered the level of downside mitigation they normally do. In contrast, some technology industries have held up much better than in previous severe drawdowns.

Past Crises Don´t Offer Much Guidance

Why has real estate disappointed? It’s possible that rising unemployment is putting additional pressure on many already struggling retail tenants. And companies with heavier debt burdens have been especially punished during this period, which has affected real estate as well as another typically defensive sector, utilities. But the biggest detractor, both in absolute and relative terms, has been consumer services; the unprecedented lockdown measures triggered a collapse in consumer spending, and particularly hit many business models that rely on human interaction, like travel, restaurants, casinos and conventions.

Meanwhile, technology hardware and equipment have held up better than expected, as companies improve their IT infrastructure to cope with remote workers. Pharmaceuticals and biotech, a classic defensive sector, have done exceptionally well this time, as investors anticipate much more spending on medical preparedness in the future. Stronger balance sheets were also helpful in these sectors.

Changes to consumer and corporate behavior are happening at an unprecedented pace. As a result, stocks are behaving differently, too. Equity investors looking to position for the challenging times ahead must adopt a dynamic approach to protecting portfolios, in our view, by rethinking the defensive attributes of stocks and searching for resilient companies in unexpected places.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams and are subject to revision over time. AllianceBernstein Limited is authorised and regulated by the Financial Conduct Authority in the United Kingdom.

MSCI makes no express or implied warranties or representations, and shall have no liability whatsoever with respect to any MSCI data contained herein.

This is a marketing communication. This information is provided by AllianceBernstein Limited, 60 London Wall, London, EC2M 5SJ. Registered in England, No. 2551144. AllianceBernstein Limited is authorised and regulated in the UK by the Financial Conduct Authority (FCA - Reference Number 147956). It is provided for informational purposes only and does not constitute investment advice or an invitation to purchase any security or other investment. The views and opinions expressed are based on our internal forecasts and should not be relied upon as an indication of future market performance. The value of investments in any of the Funds can go down as well as up and investors may not get back the full amount invested. Past performance does not guarantee future results. This information is directed at Professional Clients only and is not intended for public use.