Predictions that the cyclical momentum is peaking is prompting another broker to urge investors to add ASX expensive defensives to their portfolio.
Macquarie Group Ltd (ASX: MQG) believes that the OECD leading indicator is likely to signal a shift to the “slowdown” phase in May or June.
This could very well take the wind out of the sails of the S&P/ASX 200 Index (Index:^AXJO) after its 25% surge over the past year.
Best market gains are behind us
But gains in the new financial year starting 30 June are likely to be more subdued even though the outlook for risk assets remains positive.
“The manufacturing PMI may have already peaked as re-opening should drive a shift in spending from goods to services,” said Macquarie.
“While stimulus is not being withdrawn as quickly as after the GFC, we are past that peak too.”
The broker pointed out that the best gains for ASX shares are in the so-called “recovery” and “expansion” phases.
The types of ASX shares to buy for FY22
In the slowdown phase, you should expect lower returns and higher volatility.
“Risk appetite falls in Slowdowns with leadership shifting to defensives, particularly Health and Consumer Staples,” added the broker.
“Banks could also be an attractive defensive in this cycle as bad debts fall, and dividends rise. Banks also have the strongest EPS upgrades of any industry group and tend to outperform as bond yields rise.”
ASX expensive defensive shares outperform when volatility increases
But these shares aren’t the only ones well placed to outperform during a slowdown phase. Defensive ASX shares are also tipped to outrun the broader market despite their expensive valuations.
“They are the type of stocks that often outperform in a Slowdown,” said Macquarie.
“Rising yields are a potential valuation risk, but earnings for CSL, COH and RHC were all negatively impacted by COVID while WOW has a potential offset from the endeavour group spin-off.”
Macquarie isn’t the only one that believes you should be looking at expensive defensives during this raging bull market.
As reported on Friday, Wilsons is also urging investors to include ASX defensive expensive shares to their portfolio now.