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Stock Market Outlook: Some Values to Be Found in Defensive Sectors

Healthcare, breakfast, and gassing up the car are always necessary, even during downturns.

  • The Morningstar Global Markets Index has edged up 1% year to date.
  • Weighted by market capitalization, our coverage universe looks fairly valued.
  • We see proportionately more opportunities in less-cyclically sensitive sectors like consumer defensive and healthcare.

Our global equity coverage universe appears fairly valued, in aggregate. The market-cap-weighted price/fair value ratio across our coverage of roughly 1,600 stocks is 1.00.

Generally speaking, we're more positive on sectors that are less sensitive to the economic cycle, which might not be too surprising given the global economy is now in its ninth consecutive year of expansion. Consumer defensive ranks among the more undervalued sectors, trading at a price/fair value of 0.94 on a cap-weighted basis.

One of our top picks here is

Healthcare, another sector that tends to hold up well when the economy heads south, trades at 0.98 price/fair value. One of the names we like here is

At the other end of the spectrum, the basic materials, energy, and industrials sectors all trade above to our estimates of intrinsic value on a cap-weighted basis. In energy, we believe the market continues to underestimate the shale industry's capacity to throw oil markets back into oversupply. Crude prices have largely held above $65 per barrel for West Texas Intermediate, or WTI, in 2018, which provides attractive economics for many U.S. producers. But the reckoning may not happen as quickly as we previously thought amid supply disruptions. Eventually, we expect pain for oil prices as growing U.S. production serves as the primary weight to tip oil markets back into oversupply. Our midcycle forecast for WTI is still $55/bbl.

Canadian midstream company Enbridge is one of our top picks in this generally overbought space. We see nearly 50% upside in the stock, as we believe the market doesn't realize the full potential of the company's growth portfolio.

Our takes on the biggest themes and best opportunities in each sector can be found in the following reports:

Quarter-End Insights

Energy: Despite Geopolitical Wildcards, the Reckoning Is Still Coming for U.S. Shale Producers Real Estate: Strong Fundamentals Persist--As Do Opportunities Utilities: Back to Fair Value With Some Emerging Opportunities Healthcare: Drug Pricing Concerns Weigh on Valuations, Creating Opportunities Consumer Defensive: Attractive Opportunities in Competitively Advantaged Stocks Consumer Cyclical: The Themes Driving Retail's Rebound Industrials: Despite Bullish CEO Talk, Few Values Technology: Data Security and Privacy Remain on the Forefront Basic Materials: Overpriced, With Significant Downside Ahead for Commodities Financial Services: A Positive Outlook for U.S. Banks, More Consolidation to Come for Asset Managers Communication Services: Undervalued With a Case of Merger Fever

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