The hidden virtues of unloved cyclicals

This article is part of
What Value ‘Defensive’ Investing? - August 2013

Contrary to popular belief, it would not be without precedent for defensive stock market sectors to fare poorly during a period of market stress.

Looking back at the past 53 years, there have been 12 periods, excluding recession-related bear markets, when the S&P 500 index went through a correction of at least 10 per cent. A prime example is healthcare stocks, which underperformed in four of those periods.

While the 1999 underperformance was muted (-4.2 per cent in three months), the setbacks in 1983/84, 1977 and 1962 were far more significant.

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Until very recently, there has been a stampede by investors towards higher-yielding areas of the stockmarket, reflecting the attractive income these sectors offer and their perceived lower risk.

That lustre appears to be fading, however, and it is entirely possible investors will fare better in those underappreciated and overlooked cyclical areas that have been left behind in the equity market rally of the past few months.

Since the end of 2010, cyclical sectors have significantly underperformed, in spite of a 36 per cent rise in the market to the end of May this year. Sectors with perceived growth and cyclical characteristics have been left behind.

Ultimately, while cyclical stocks are often viewed as the best way for investors to capitalise on expectations of stronger economic growth and higher stock markets, this time it is just possible these sectors might be the best way for investors to protect some value.

Justin Oliver is a member of the asset allocation committee at Canaccord Genuity