The rise in equities is not handicapping defensive assets !

After the violent crash of global equity markets in March, one might have expected that during the (technical!) rebound, defensive assets would have been penalized. This is not the case! Gold (+20%), Silver (+57%) and Platinum (+45%) have been rising since mid-March. Even better, Gold (+14.5%) and Silver (+2.5%) have outperformed the main US stock market index (S&P -5.25%) since the beginning of the year. One could also mention the good performance of the CHF or JPY as a safe haven.

To draw a parallel, the rebound observed right after the 2008-2009 bear market clearly benefited to equites vis-à-vis traditional defensive asset classes. The first 3-month rally after the 2008-2009 pushed the S&P up by 43% the 11 of June from its March lows. In this favorable context, Gold remained on the back foot.

Looking at the current phase, there is renewed interest in defensive assets that are expected to offer a limited level of correlation with assets that are deemed to be more volatile. The origin of this temporary concordant evolution between « defensive » and « offensive » assets probably stems from the nature and configuration of the decline.

Let’s take a look at the equity markets. During the market downturn, there was a clear discrimination in sector performances. While the technology and healthcare sectors were digesting the crash serenely, the energy, finance, utilities and industrials sectors were suffering heavy damage.

The second rebound phase we have been witnessing in recent days is now focusing on the market segments that were neglected during the first rebound phase. This momentary phenomenon leads us to say that the renewed interest in the previously sacrificed sectors resembles at a « bottom fishing » phase and is not really based on any long-term fundamental reasoning or on the potential of the sector.

From our point of view, it is safe to say that, apart from short-lived technical effects (catch-up effect), equity markets will continue to favor disruptive sectors such as « Information Technology » and « Communication Services » as well as healthcare stocks.

Furthermore, as mentioned above, the good performance of defensive assets indicates that investors continue to be cautious, certainly due to a lack of visibility. Without listing them all, the economic and political risks remain and advocate in favor of maintaining exposure to these defensive assets within portfolios.

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