Stay Defensive

Global Equity Sell-Off: A Risk-Off Strategy and Defensive Plays

Market Volatility

Amid one of the steepest equity sell-offs in years on Wall Street, investors may be tempted to buy the dip, but equity analysts are advocating a risk-off strategy and a shift towards defensive plays instead.

Caution Against Premature Buying

For now, we continue to caution against prematurely buying into market weakness, especially in the US, said Philipp Lienhardt, head of equity research at Julius Baer. In fact, he recommends that any short-term strength in US equities could be an opportunity to sell, and further diversify into other markets.

Volatility and Uncertainty

Policy uncertainties will likely persist for months, and volatility in equity markets will likely remain high, Lienhardt said. On a positive note, we may have seen ‘peak tariff news.’ Louis Koay, senior financial services director at Phillip Securities, believes there is no need to "overreact by panic selling" despite investors shifting into risk-off mode. If you are a speculative trader, this is a clear signal to cut your losses and preserve capital, the trend is your friend – and currently, the trend is pointing downwards, Koay said.

Fed Dilemma

The US Federal Reserve previously raised interest rates to tackle inflation – by making borrowing more expensive to reduce consumer spending. But blowback from the tariffs could lead to slower economic growth. And market watchers believe that rate cuts could follow, as higher rates would exacerbate a slowdown.

Defensive Plays

For one, market watchers say that despite an expected negative impact overall, Singapore equities could outperform its regional peers as its 10 per cent tariff hit is the smallest. Of course, the secondary impact from a global growth shock needs to be watched, but we see a silver lining from Singapore’s fiscal health, which gives dry powder to cushion the blow, said Thilan Wickramasinghe, head of research for Singapore at Maybank Securities.

Potential Winners

Some potential winners could emerge from some cash-generating sectors. Industrials have strong bottom-up growth drivers, Wickramasinghe said. ST Engineering (STE) is benefiting from a global upcycle in defence spending, plus corporate restructuring could further optimise capital returns; (while) Sembcorp Industries has significant earnings visibility driven by contracted utilities, while also enjoying energy-transition growth.

Conclusion

With earnings season just around the corner, investors will be eager to hear from companies regarding the extent to which they may be able to mitigate the effects of the announced tariffs. However, the most important impact for companies will likely be the net impact on demand, said Julius Baer’s Lienhardt. Beyond the downside risks to earnings estimates, valuation multiples will likely remain under pressure as long as the uncertainty persists.

Frequently Asked Questions

Q: What is the current market situation?

A: The equity market is experiencing a steep sell-off, with investors shifting into risk-off mode.

Q: What is the recommendation for investors?

A: Equity analysts are advocating a risk-off strategy and a shift towards defensive plays.

Q: What are some defensive plays?

A: Some potential defensive plays include Reits, high dividend yield plays, and companies with more certainty in earnings.

Q: How will the tariffs affect the US economy?

A: The tariffs could lead to slower economic growth and a potential rate cut by the Federal Reserve.

Q: What are some potential winners in the current market?

A: Some potential winners could emerge from cash-generating sectors, such as industrials and utilities.