Equity investors may seek shelter in defensive sectors

Investors who are heavily invested in equities may be willing to seek a certain degree of safety, such as exposure to essential consumer goods, which are generally regarded as less volatile in the current market conditions. 

The third-quarter earnings season, which will kick in later this week, has the eye of several US banks and investors at large. The fears related to this earnings season are many. With growing geo-political uncertainty, signs of economic fragility, and the strong possibility of weaker earnings, the current market predicament seems understandably tense.

To provide some context to the situation, the trajectory for earnings growth for the S&P 500 in the most recent quarter could mark the lowest earnings growth rate reported by the index since the third quarter of 2020. Estimates for the third quarter have fallen significantly from more than 11 per cent at their peak in June.

The bear market we have had so far this year has been the trigger for concerns among investors who have recently seen major losses in their portfolios. The situation for buy-side investors seems to be negative in the short term whilst not excluding long-term recovery, improvement, and growth. 

Lower valuation multiples do not necessarily imply that equities are trading cheaply, however. The possibility of a correction is also not to be excluded at this point. Regardless, there are still those who believe that it is a good time to buy, given where valuations stand at the moment. That said, investors may place greater importance on certain areas over others.

For the time being, the market may reflect clear hesitation with regards to riskier investments and some investors might avoid riskier sectors altogether. The sectors that remain the most attractive for equity investors are those that provide a degree of safety due to their underlying inelasticity, such as those related to essential consumer goods and healthcare.

Healthcare in particular may prove to be a good example since it only accounts for 8.6% percent of total US GDP when compared to other sectors, such as real estate and finance, which together account for 22.3% according to data from statista.com. This tells us two things: aside from the fact that people collectively tend to spend more on non-essential services than they do on necessary ones, the sector itself might still have potential to grow steadily in the long term. 

In conclusion, while equities are not the most favorable investment in the current market environment, there may still be hope for bullish investors as they tread carefully through these volatile markets in days of uncertainty. 

Disclaimer: This article is brought to you by Shaun Frendo, Research Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd, which is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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