Although the FTSE 100 is only slightly down year-to-date, it is fair to say that 2018 has been punctuated by some fairly volatile trading days.

On 25 June the index saw its biggest one-day fall since April 2017 as trade war fears escalated and on 15 August a dive in copper prices saw the market hit a four-month low.

It is therefore unsurprising that research conducted by investment bank UBS reveals traditional defensive sectors have started to perform well over the summer.

The bank’s strategy team comment: ‘Defensives have bounced back significantly in Europe since June as economic data surprises turned negative, political uncertainty became the focus for many investors and trade war concerns escalated.

‘In most of the first half of the year cyclical sectors dominated performance and accounted for the large majority of the outperforming sectors. The major exceptions were Food Retail and Healthcare Equipment as the only outperforming defensives and Banks as the major cyclical underperformer.’

This trend has reversed in the last two-and-a-half months with Tobacco, Food Producers and Pharmaceuticals the top performers and Mining, Autos and Construction the worst.

The question posed by UBS is whether this is a temporary blip or a more enduring shift out of cyclical stocks.

Supporting the latter assumption, the bank notes its UBS Eurozone data surprise index, measuring how economic releases compare with forecasts, has recently suffered its sharpest deceleration since 2010 into 2011. (TS)

What are defensives?

All economies experience recurring and fluctuating levels of economic activity over a period of time, with the five main stages of the business cycle running as follows: growth, peak, recession, trough and recovery.

The business cycle is usually replicated in the stock market with the market going up when the economy is growing and going down when it is contracting.

Different types of stocks tend to perform well at different points in this cycle and at times of economic or market uncertainty ‘defensive’ stocks come to the fore.

In theory defensives can offer investors a defence against falling markets because they do not fall as far or as fast as other stocks.

They can be found in sectors and industries such as utilities, consumer goods, pharmaceuticals and tobacco. What they have in common are relatively stable revenue streams, with demand for their products and services less affected by the state of the wider economy.

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