Investors flee to defensive stocks amid AI fears

Investors are rapidly shifting their investments towards "defensive" stocks, such as consumer staples and healthcare sectors, in anticipation of a potential market downturn as concerns over the end of the AI bull market grow. Defensive sectors, characterized by reliability during economic uncertainty, have been experiencing a resurgence in recent weeks.

For instance, the MSCI consumer staples index witnessed its most substantial monthly surge in nearly three decades, increasing by 10.6%, while its global healthcare index recorded a 9.8% gain – the second-highest increase in the past century. Meanwhile, the MSCI global technology stocks index has plummeted by over 13% since the beginning of October.

Schroders analysts attribute the shift to a growing skepticism of technology sector valuations and concerns over the long-term funding plans for the AI-driven expansion. The tech-heavy Nasdaq Composite Index has not enjoyed the same benefits as investors seek safety, with European stock markets, rich in consumer staples and healthcare stocks, witnessing a sharp rise.

The FTSE 100 increased by 1.5% over the past month, while Germany's Dax climbed by 5.1%. Switzerland's Market Index surged by an impressive 8.4%, fueled by pharmaceutical firms Roche and Novartis. Despite rising shipping and energy costs resulting from the conflict in the Middle East, individual consumer staple companies have returned to gains.

Unilever, known for brands like Dove and Vaseline, has gained 4.1% in the last month, while Reckitt Benckiser and Diageo have increased by 8.1% and 13%, respectively. US-listed staples stocks have also posted gains, with Walmart rising over 15% since the Nasdaq Composite peaked on October 6 and Coca-Cola climbing more than 10%.

Citi analysts termed the shift "violent," citing a deceleration in earning revisions and plummeting AI sentiment as the primary drivers. Beata Manthey, head of European equity strategy at Citi, upgraded her recommendation on European stocks, excluding the UK, due to the region's lighter exposure to tech. Other asset managers, including Pictet and Blackrock, have also adopted a defensive tilt by reducing their exposure to the US.

Some analysts believe that the outcome of the US midterms has exacerbated fears about the sector, as the Democrats secured a decisive victory in the election, taking control of the Senate and the House. This result triggered a sharp sell-off in AI-related stocks due to concerns over the party potentially halting the pace of data center construction.

Asset managers advise investors to consider their defensive allocations with a longer time horizon, highlighting quality companies with stable businesses that trade at attractive prices as historically resilient in the current market conditions.