Bank of America (BAC) released a report today suggesting that investors are “nervous bulls” after the sentiment among global fund managers improved in September. The increase in sentiment can be attributed to the rising expectations of a soft landing for the economy, which is when inflation cools without causing a recession. Indeed, this seems to be the base case for 79% of the 206 fund managers that were surveyed.
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However, the nervousness comes from how investors are actually positioning their portfolios. In fact, a lot of them have moved their money into utility stocks, which are bond-sensitive assets that become more attractive as interest rates fall. This is because they generally pay higher dividends and have stable cash flows regardless of the economic environment. Therefore, they tend to attract income investors during low-rate periods.
Essentially, in a recession scenario, rates will be cut more drastically, thus making the utility stocks more of a hedge for such an outcome. Interestingly, it is also worth noting that the sector is at its highest overweight level since 2008. At the same time, investments in commodities, which are more vulnerable to market downturns, are at their lowest levels since mid-2017.
Is XLU a Good Stock to Buy?
Turning to Wall Street, analysts have a Moderate Buy consensus rating on the utilities sector (XLU) based on 23 Buys, 10 Holds, and zero Sells assigned in the past three months, as indicated by the graphic below. After a 25% rally in its share price over the past year, the average XLU price target of $79.06 per share implies that the sector is fairly valued at the moment.
