What is a defensive trade today?

What You Need to Know

With more investors looking for defensive trades, what counts as a defensive trade in today’s environment? Differences in valuation—and different interpretations of what counts as defensive—mean that not all such trades are equal.

To be clear, we are not bearish. We think that global equities will still deliver positive returns over the course of 2025, and strategically an overweight position in equities is needed as a source of positive real returns. This is the case even if equity returns are set to be muted versus investors’ past experiences. Nevertheless, we think volatility will remain high, and the policy environment is highly uncertain.

We suggest that the low-volatility factor in equities, short-duration inflation-protected bonds, precious metals and some private assets are attractive defensive trades today. However, the quality factor, both in equities and credit, is more expensive than it usually is and may prove to be less defensive this time.

We discuss the differences between defensive trades designed to protect against drawdowns and longer-term sources of diversification for those blessed with more extended horizons.

Additional Contributors: Alla Harmsworth, Robertas Stancikas, Harjaspreet Mand and Maureen Hughes

With the selloff in risk assets over the last month, the jump in volatility and a highly uncertain policy environment, hunting for defensive trades has acquired a degree of urgency. We recently made the point that while the geopolitical magnitude of recent policy announcements is momentous, from a financial market perspective we view the recent bearish turn as tactical rather than structural. This in part reflects an unusually strong degree of consensus in the US-growth trade post election. We do think that equities will eke out a positive return for the year, but we do expect volatility to remain high.

Strategically, investors who need to generate a positive real return over inflation must maintain a high level of risk in their portfolios. Thus, our strategic asset allocation remains heavily overweight public equities, illiquid assets and active strategies. But alongside that core allocation, what is the hedging asset to counteract this position in the current environment? What trade counts as defensive changes over time and depends on what a given investor wants to achieve.

In this note, we compare multiple possible trades that could be considered defensive in the current environment. However, we show significant differences between them. In particular, quality (both in equities and credit) is more expensive than normal today. Specifically, the premium in valuations between high- and low-profitability equities is unusually large and the spread of investment-grade credit over government bonds is tight. This raises the risk that quality will not be as defensive as it has been historically, and to some extent that risk has shown up in recent performance (Display 1).

For different reasons, the defensiveness of nominal bonds also needs to be considered. Mainly, this depends on what investors are trying to achieve. US government bonds (although not German bonds, given the recent momentous change in fiscal stance) have indeed been effective at offsetting the sharp drawdown of the last month, and if investors are focused on short-term drawdown protection, the role of bonds is important. However, we think such assets are less useful for longer-run diversification of equity beta in a higher-inflation regime.

Given historical efficacy and a view on current valuations, the low-volatility factor in equities, short-duration inflation-protected bonds, precious metals and some private assets are defensive trades. This list might look eclectic, but it just reflects our long-running belief that an approach to multi-asset investing predicated on asset-class building blocks is not optimal in today’s world. We would prefer a total-portfolio approach that makes the portfolio-design task one of blending return streams that can span public and private spheres, passive and active approaches and asset clases.