Defensives lead bounce in stocks

Defensive issues led the market’s bounce higher at the end of the week, with those sectors which stood to gain the most from a vote by Britons to remain in the UK pacing gains on the top flight index.

Although low inflation boosts consumers’ spending power, it is of scant benefit if it comes alongside a possibly considerable slowdown in the economy, hiring and wage growth.

Hence, consumer staples – namely grocers - benefited the most from reports that bookies were cutting the odds on the ‘Remain’ camp winning the day at the upcoming referendum.

Until recently at least, the risk of the Leave campaign succeeding in its bid for the UK to exit the EU had been seen by most commentators as the chief factor feeding recent heightened economic uncertainty.

According to the Financial Times, William Hill reduced its odds that the backers of the Remain vote would come out on top at the polls for a third consecutive day on Thursday, to 1/5.

Unsurprisingly, shares of some the major homebuilders weren’t far behind, with the likes of Berkeley Group Holdings and Barratt Developments also to be seen near the top of the leaderboard for the Footsie.

Bookmakers aside, on the basis of the past week's polling results John Curtice, Chief Commentator on the What UK Thinks: EU website, was less certain that Remain would indeed finally prevail.

Curtice, who was also a senior research fellow at NatCen and professor of Politics at Strathclyde University said: "[...] for now what we do have to conclude is that collectively the latest round of polling does not provide clear evidence that a swing to Remain is in motion. The lesson of this week is that, as polling day begins to approach, it will become increasingly important to read the polls with a cool head and an open mind."

What was arguably less clear, up to a point, was why big pharma also did quite well against the backdrop of a rising stock market, although such a pattern was sometimes a poor omen for the broader market going forward.

To take note of, the DJ Stoxx 600’s health care sub-index, which covers the sector at the pan-European level, paced gains on Friday, notching up a gain of 1.75% or 10.73 points to end the day at 623.55.

Defensive stocks are expensive on some metrics after having outperformed the market by a wide margin since the 2007, 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.

Citi’s index of defensive shares was sporting a dividend yield of 2.7% at the time of writing, in comparison to 0.8% for global bonds, Buckland went on to explain.

In the specific case of Shire, the drugs-maker got a leg up from JPMorgan Cazenove, which lifted its price target on the overweight-rated stock to 5,600p from 5,300p and added it to its 'Analyst Focus List'.

The acquisition of US-based Baxalta builds a more sustainable company trading at a compelling valuation, the broker said in a research note sent to clients.

"The problem is that while we are seeing some respite for US equity selling, there is clear evidence that we could be turning a corner, where further losses may be around the corner.

"For UK investors, the FTSE100 has been moving nowhere fast in recent weeks, as the doubt and hesitancy seen in the face of a Brexit and possible June rate hike keeps the index restrained within a 160 point range," said IG analyst Joshua Mahony.

Mahony also referenced the upcoming G7 meeting over the weekend as a potential source of uncertainty for markets.

Other defensive sectors that were in demand were electricity and fixed line telecommunications.

The major banking groups also put in a good showing.

To take note of, all three of the latter could arguably be expected to benefit from easier monetary policy in the UK as well.

On that note, overnight the Monetary Policy Committee’s Gertjan Vlieghe alluded to the possible need for it.

He was followed on Friday by Kristin Forbes, one of the MPC’s external members.

In an interview with the Belfast Telegraph, she said that to the extent that the slowdown in the UK economy was related to uncertainty around the 23 June Brexit referendum, then those doubts should lift quite quickly should Britons choose to remain.

Nonetheless, and on a more cautious note, she observed that: "We don't have concrete evidence that some of the softening we are seeing now is all referendum-related and uncertainty related, and there is a chance other things are going on."

Top performing sectors today

Food & Drug Retailers 2,686.09 +2.69%

Life Insurance 6,813.89 +2.52%

Electricity 8,972.99 +2.48%

Pharmaceuticals & Biotechnology 12,271.68 +2.37%

Fixed Line Telecommunications 5,037.08 +2.26%