On Monday, the consumer defensives sector was downgraded to Underweight at Julius Baer due to expectations of underperformance in a climate of accelerating global growth momentum and sustained higher yields.
This sector, which is often seen as a safe investment during times of low growth and yields, has experienced difficulties over the past year, falling behind the broader equity market.
"Given our view of an acceleration in global growth momentum and rates that will likely stay higher-for-longer, this should translate into a continued challenging backdrop for the sector," wrote Julius Baer in a note.
The downgrade reflects a broader trend of defensive sectors struggling in the current economic environment. As growth picks up speed and interest rates are anticipated to remain elevated, these traditionally stable sectors face headwinds. Consumer defensives, in particular, have shown the weakest earnings momentum among all sectors analyzed.
Despite the sector's appealing relative valuations following its recent underperformance, the lack of positive catalysts remains a concern. The only potential boost for the sector would be a significant drop in bond yields triggered by growth concerns, which is not expected to occur. The sector's outlook is further dampened by consumers' ongoing shift toward cheaper alternatives, leading to continued volume declines.
Within the consumer defensives sector, there is a preference for household and personal care products over food producers. The former subsegment has demonstrated stronger pricing power, which may offer some resilience amidst the sector's broader challenges.
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