LONDON (Reuters) - Stocks usually perceived as defensive are offering scant protection from Europe’s debt crisis as the broader equity market languishes close to 2012 lows, making investors work harder to find shelter from the storm.
Defensive stocks, such as food and healthcare companies, have fallen in tandem with the rest of the market as the euro zone’s debt problems remain unresolved against a backdrop of stuttering global growth.
The Euro STOXX 50 .STOXX50E suffered its worst month since August in May, with every sector trading in the red in an indication that none is deemed particularly safe.
“The problem investors have with equities is that they’re high risk assets. Even if you buy a high-quality defensive equity, it is still an equity - very sensitive to changes in inflation assumptions, risk assumptions, growth assumptions,” said Andrew Lapthorne, chief quantitative analyst at Societe Generale.
Whatever the economic conditions, people need to eat, drink and take medicine, meaning food & beverage .SX3P and healthcare .SXDP tend to perform steadily, and are relied upon for strong earnings and regular dividends even as markets fall.
The sectors, off 3.8 percent and 3.4 percent respectively since May peaks, might have significantly outperformed the Euro STOXX 50, down 6.5 percent over the period, but this offers little comfort to those hoping for positive returns.
The 30-day correlations between the two sectors and the Euro STOXX 50 have surged higher to levels not seen since early November, showing that most of the time a fall in the broader market now leads to weakness in those sectors too.
This chimes with what happened during the financial crisis in 2008, when food & beverage shares shed about 30 percent of their value but still outperformed the broader market.
Utilities .SX6P and telecoms .SXKP, also long held up as safe bets catering to basic consumer needs, are being pressured by worry over policy intervention by euro zone countries desperate to boost their budgets.
These sectors are off 5.6 percent and 4.5 percent, respectively, since the start of May.
Technical charts add to the grim picture. The recent break below 400 points on the STOXX food & beverages index, both a resistance and support level, means it could test its January lows at 380, said Valerie Gastaldy, head of Paris-based technical analysis firm Day By Day.
The technical outlook for healthcare is also breaking down, with its short-term trend having recently reversed, and its medium-term trend at best flat, she said.
With the charts emitting sell signals in sectors across the market, analysts say investors would do well to focus on individual stocks.
“The choice between cyclicals and defensives is less clear cut than it was in 2011 in the sense that even within cyclicals and within defensives you see quite big differences,” Patrick Moonen, senior equity strategist at ING Investment Management, said.
“Going forward, looking at cyclicals as a group but really digging into sectors where earnings momentum is relatively strong - that’s a rewarding strategy. The same goes for defensives.”
Buying companies with exposure to Asia, which boasts robust growth, is a sound strategy, Moonen argued. He sees opportunities within consumer staples and, to a lesser degree, healthcare.
Nomura, in a strategy note in which it picks out stock ideas “in a world of hurt”, identified Greece’s Coca Cola Hellenic Bottling Co HLBr.AT and Spain’s Grifols (GRLS.MC) as among “growth defensive” stocks worth considering.
Highlighting the difficulties money managers face in compiling a sector portfolio, 2012’s best performing sector is in cyclical stocks, whose fortunes are often closely aligned with the business cycle.
The auto sector .SXAP, buoyed by demand for cars in the United States and China, jumped 9.6 percent this year as other cyclicals suffered sharp sell-offs, with retailers .SXRP and commodity-related stocks .SXEP .SXPP down 6.9-7.6 percent.
Editing by Nigel Stephenson