When the going gets tough in markets, the tough often go defensive. But a fresh note from UBS suggests that sticking too closely to this old playbook may no longer be as safe (or as smart) as it once was.
UBS’s latest analysis dives into the tug-of-war between cyclical and defensive stocks, urging investors to take a more nuanced view of what “defensive” really means in today’s market.
Traditionally, defensive stocks (think utilities, healthcare, and consumer staples) are seen as safe havens during economic slowdowns. They’re called defensive because their earnings tend to hold up better when growth falters.
Cyclicals, on the other hand, such as industrials, materials, and tech, are more tied to the economic cycle. They typically outperform when growth is strong but take a hit in recessions.
But here’s the catch: UBS says the lines are blurring. The concept of defensiveness is evolving, the note explains, pointing out that some companies typically viewed as defensive have become more volatile, while certain cyclicals are showing stable earnings growth and better cost control.
Take tech stocks, for example. Some high-quality names in this sector now boast stable revenue streams and healthy balance sheets, giving them characteristics traditionally associated with defensive plays.
Meanwhile, parts of the consumer staples sector are facing margin pressure from cost inflation and shifting consumer preferences, making them less of a sure bet than they once were.
UBS recommends investors focus less on traditional labels and more on specific company fundamentals.
Their model suggests identifying stocks with low earnings volatility, strong pricing power, and solid cash flow. These traits are increasingly found across both defensive and cyclical sectors.
The note also cautions that simply crowding into defensive names may backfire. Positioning is stretched in many defensive areas, UBS writes, warning that valuations are already high and upside may be limited if growth surprises to the upside.
In short, the age-old battle between defensive and cyclical investing isn’t dead, but it’s definitely changing.
As UBS puts it, successful investing today means digging deeper than sector labels and understanding the real drivers of resilience and risk in each company.