Hold onto defensive stocks, Citi says

Defensive stocks are expensive on some metrics after having outperformed the market by a wide margin since the 2007 but investors would be best advised to hold on to them, analysts at Citi said.

Since their peak before the Great Financial Crisis they had risen by 66%, versus an advance of 16% for the MSCI AC World benchmark.

That had left valuations looking stretched.

Yet in comparison to other defensive assets they still looked cheap, Citi analysts led by Robert Buckland said in a research note sent to clients.

Their index of defensive shares were sporting a dividend yield of 2.7% at the time of writing, in comparison to 0.8% for global bonds.

"This presents us with a paradox – defensive valuations against other equities are telling us to sell, but valuations against bonds are telling us to buy.

"We recommend that multi-asset investors should keep buying defensive equities, perhaps with a hedge against any sharp increase in rates. We would warn equity - only investors that a wholesale underweight in defensives is dangerous in this low rate environment."

In a separate note, the investment bank's global strategists reiterated their 'bearish' stance on the US S&P 500, explaining to clients that expectations for interest rate hikes by the US central bank had increased and economic data stateside remained mixed, even if international factors were now less negative.