Are Defensive Stocks Now Riskier Than The Rest Of The Market?

So many investors around the world are cautious in today’s market that defensive stocks may have become a risky bet. According to Citi analyst Robert Buckland, defensive stock valuations are historically high and are becoming an increasingly crowded trade.

Citi’s global defense index currently trades at a PE of 22x, up from 12x in 2009. In addition, the index is now 66 percent above its pre-crisis peak. The MSCI AC World has only eclipsed its pre-crisis peak by 16 percent.

The overvaluation of defensive stocks creates a paradoxical dilemma for equity investors looking to play it safe. Buckland says that defensive stocks look expensive compared to other stocks, but still compare favorably to other defensive asset classes, including bonds.

“We recommend that multi-asset investors should keep buying defensive equities, perhaps with a hedge against any sharp increase in rates,” Buckland advises.

Related Link: How Do Rising Interest Rates Affect The Average American?

For equity-only investors, he cautions that going underweight defensive stocks in such a low rate environment can be dangerous.

Instead, Buckland suggest stock-pickerS look to Citi’s “Bond Refugee” screen for ideas.

Citi’s “Bond Refugee” screen of large cap stocks with high dividend yields and no share issuance in the past three years includes the following Buy-rated U.S. stocks:

General Mills, Inc. GIS
The Coca-Cola Co KO
AFLAC Incorporated AFL
Wells Fargo & Co WFC
General Electric Company GE

Disclosure: the author holds no position in the stocks mentioned.