- Equities: Heightened fiscal concerns reinforce the need for defensive tilt in portfolio
- Credit: Investors should prioritise a barbell duration credit strategy and avoid ultra-long duration
- FX: UST yield remains elevated; US fiscal concerns reinforce the "Sell America" narrative
- Rates: Fed cuts and potential ultra-loose fiscal policies to support further UST curve steepening
- The Week Ahead: Keep a lookout for US Initial Jobless Claims; Japan Industrial Production Numbers
Equities: Fiscal concerns drive defensive tilt
Investors taking on a defensive tilt. The S&P 500 declined -2.6% last week, weighed down by concerns over US fiscal debt following Moody’s downgrade and the passage of Trump’s “One, Big, Beautiful Bill”. Risk sentiment deteriorated further with the VIX index spiking by 29% to a high of 22.29 during the week, up sharply from 17.24 on 16 May 2025. This increase reflects elevated market volatility and growing investor caution. Despite the uptick in uncertainty, analysts have kept their S&P 500 forward earnings forecasts largely unchanged for the week, suggesting that fiscal concerns have yet to materially alter their outlook on corporate fundamentals.
On a sectoral basis, US fund flows into healthcare and consumer staples have remained robust for the week, registering inflows of USD724mn and USD511mn respectively. These figures represent increases of 18.4% and 1.8%, compared to their average weekly flows for the year. In contrast, cyclical sectors exhibited more cautious positioning. Inflows into financials and consumer discretionary have declined sharply, falling 95.0% and 56.3% below their average weekly flows for the year respectively. We expect this risk-off sentiment to persist, favouring defensive sectors which have earnings stability and more predictable cashflows.
Topic in focus: The importance of staying invested. Notwithstanding the latest bout of market volatility, an important lesson for investors to keep in mind is to stay invested. Take the “Liberation Day” tariff sell-down and subsequent rebound as a case in point, most major equity indices worldwide have since recovered past their levels on 2 Apr. The recovery serves as a great reminder of the challenges inherent with trying to “time the market”. The tight clustering of best and worst performing days for equities suggests that if fear pushes an investor to exit during times of market volatility, there is a high chance they would miss out on the subsequent snapback rallies. In this context, we advise investors to stay invested in equities, albeit with a defensive tilt:
- European utilities. Not only as a defensive play but also as an income-oriented equity allocation within the portfolio, European utilities are particularly attractive now due to structural shifts towards decarbonisation, electrification, and energy security. Many European utilities offer (i) stable, regulated cash flows, (ii) attractive dividend yields, (iii) defensive business models, and (iv) growing exposure to renewables and energy transition infrastructure.
- European consumer staples. As a key part of any defensive equity strategy, European consumer staples companies offer stable earnings, global brand reach, and resilient demand regardless of economic conditions. Many also provide attractive, growing dividends and strong cash conversion. Included in the sector are leading companies such as Unilever, Nestlé, Danone, Reckitt Benckiser, Beiersdorf, and Ebro Foods. These are globally recognised household names specialising in F&B, personal care, household products, health, and hygiene products.
Figure 1: Sustainable dividends amplify total returns
Source: LSEG, DBS
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