GlaxoSmithKline, Vodafone and many other defensive stocks are 'cheap, cheap, cheap', analysts say.
European equities have climbed 30-35% since March lows and defensives have unsurprisingly been left behind in the rally, underperforming by 10-20% since early-March. This means investors can pick them up at a rare discount, said Adrian Cattley, strategist at Citigroup.
'Defensives were on record high (“end of world”) ratings in late 2008/ early-09. That has been quickly priced out,' said Cattley.
'Many investors have also used defensives, especially large-caps, as a source of funds for the risk trade. As a result, defensive stocks and sectors have moved from looking expensive to cheap in three months,' he added.
He calculates the bear market re-rating of defensives relative to cyclicals saw them move from a 20% premium (based on a 12 month forward price over earnings valuation) to a 70% premium at the end of 2008 to a 20% discount now.
Cattley thinks defensives look cheap in absolute as well as relative terms even though the telecoms, healthcare, food & beverage, food retail and utilities sectors are all trading close to their 15-year lows based on price over earnings valuations.
He says those investors who have spurned the sectors in recent moths have failed to take into account the fact that earnings have remained stable and balance sheets are generally strong.
Many of these stocks also have significant exposure to superior growth from emerging markets and most have strong balance sheets so won't need to refinance, he adds.