US institutional investors have assumed a defensive orientation in the first month of this year and are increasingly wary of both consumer cyclicals and industrials. At the same time, they are increasing investment in healthcare, energy, consumer staples and gas utilities. Or so suggests the flow of funds data published by State Street.
State Street speculates that the defensive posture is not so much a pullback in risk appetite as a paring back of “old economy” investment. For example, technology flows have continued to improve over the past month, led by significant positive sentiment toward semiconductor stocks. The semiconductor group, down more than 20% in 2004 is still being sold but at a less aggressive pace.
Flows into consumer discretionary stocks have continued to slip, with decelerating flows or increased selling in autos, internet retail and specialty retail. After a 21- month bull run, institutional investor appetite for industrial stocks is waning with significant drops in flows to air freight and machinery.
US equity markets actually began the year with their worst start since 1982 (three down weeks in a row). Investors responded by searching for save havens — including energy, gas utilities and healthcare.
January investment flow patterns demonstrated three distinct trends, all of which suggest a rotation toward a more defensive and less cyclical regime. First, as crude held above the critical $40/barrel level, investors rotated back into energy shares. Second, flows into industrial stocks weakened. Finally, flows into healthcare improved with pharma flows accelerating into the top tier.