Investors are ditching tech stocks for ones they believe can shield them from a market downturn as fears over the end of the AI bull market continue to grow.

So-called defensive sectors, which include consumer foosa, healthcare and utilities, have come back into favour in recent weeks as investors hunt for reliability amid wider global uncertainty.

The MSCI consumer staples index posted its largest monthly gain in nearly 30 years in October, rising 10.6 per cent. 

Meanwhile its global healthcare index recorded a 9.8 per cent increase, the second-highest of the century. It was defeated only by the start of the Covid pandemic, which caused gains of 12.4 per cent in April 2020.

In a sharp contrast, the MSCI global technology stocks index has plummeted over 13 per cent since the start of October.

“Investors grew increasingly sceptical of technology sector valuations and questioned the long-term funding plans for the massive AI build-out,” Schroders analysts said in a note to investors.

“Amid the major repricing of technology and the countries with tech-heavy equity markets, defensive sectors like energy, consumer staples and healthcare showed notable strength globally.”

Europe feels the benefit

While the tech-heavy Nasdaq Composite Index has failed to reap the benefits of investors looking for safety, European stock markets boasting a range of consumer staples and healthcare stocks have recorded a sharp rise.

The FTSE 100 has gained 1.5 per cent in the last month, while Germany’s Dax jumped 5.1 per cent.

The Swiss Market Index rose a staggering 8.4 per cent, boosted by pharmaceutical firms Roche and Novartis.

Individual consumer staple companies who have seen their share price struggle against rising shipping and energy costs caused by the conflict in the Middle East also returned to gains.

Unilever, which owns brands such as Dove and Vaseline, has posted a 4.1 per cent rise in the last month, while Dettol owner Reckitt Benckiser and Diageo are up 8.1 per cent and 13 per cent respectively.

But US-listed staples stocks also posted gains, with retail giant Walmart rising over 15 per cent since the Nasdaq Composite peaked on 6 October and Coca-Cola climbing more than 10 per cent.

Downgrades and market jitters

Citi analysts dubbed the rotation “violent”, but noted that the outperformance could continue into the more cyclical part of the market next year.

“Earning revisions have decelerated and AI sentiment has plunged,” wrote Beata Manthey, head of European equity strategy at Citi in a note to clients where the bank explained its decision to downgrade a host of US and global tech stocks.

Manthey simultaneously upgraded her recommendation on European stocks – excluding the UK – in reflection of the region’s lighter tech exposure.

Other asset managers have adopted a defensive tilt by reducing US exposure, including Pictet and Blackrock, with some analysts saying the result of the US midterms has propelled fears of the sector.

The Democrats last week secured a decisive victory in the election, winning key battleground states to take control of the Senate and the House. Their win triggered a sharp AI sell-off driven by fears the party would halt the pace of data centre construction.

“Investors should review their defensive allocations with a longer time horizon in mind,” said Kent Hargis, chief investment officer of strategic core equities at Alliance Bernstein.

“Quality companies with stable businesses that trade at attractive prices have historically held up well in the conditions now taking shape, and offer an attractive risk/reward profile for the market challenges ahead.”