Equities: Defensive rotation with higher yields – Danske Bank

Danske Research Team reports a significant decline in global equities on Tuesday, with the S&P 500 and Stoxx 600 both down by 0.7%. After a phase of value against growth rotation, investors have been moving towards defensive sectors like consumer staples and healthcare, with cyclicals also contributing to the shift. Experts anticipate continued defensive outperformance as higher yields pose rollover risks in already elevated leading indicators.

European banks have outperformed real estate by 7 percentage points since long-term yields started rising meaningfully about a month ago. However, the rotation recently leaned towards a more conventional defensive preference. Investors directed their funds towards sectors like consumer staples and healthcare, bolstered by cyclicals such as tech, industrials, and materials, all of which saw a decline of 2-3%. Futures markets are still in a downward trajectory this morning.

This type of defensive rotation is anticipated to be more prevalent in the future, as mentioned in last week's Equity and Cross-Asset Strategy report. The rise in higher yields brings the risk of a rollover in leading indicators, which are already more susceptible to rollovers due to their elevated levels. Such a rollover would typically be associated with defensive performance.