The defensive sectors all sport aggressive valuations and carry hidden duration, or interest rate sensitivity. If interest rates rise even modestly in 2015––as we expect they will––these sectors are likely to perform poorly, as their valuations are particularly sensitive to rate rises.
Instead of taking on more exposure to these parts of the market, we would prefer to source our yield from other places, including U.S. high yield bonds and more cyclical sectors of the equity market, which could be poised to benefit from an improving economy.
Source: Bloomberg.
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. He is a regular contributor to The Blog and you can find more of his posts here.