5 Defensive sectors J.P. Morgan analysts are bullish on

J.P. Morgan analysts outlined five defensive sectors they feel bullish about.

Bond proxy defensive sectors, such as utilities (NYSEARCA:XLU), real estate (XLRE), and staples (XLP) were the worst three performers in the first quarter. On the second quarter, this has changed. Quarter-to-date, these sectors have driven a 10% performance recovery, analysts said.

Analysts believe this performance will last and said cyclicals such as consumer discretionary (XLY) and financials (XLF) should “not be working in the current environment.”

These are the five defensive sectors:

1. Healthcare (NYSEARCA:XLV)

Novo Nordisk A/S (NVO) drove most of the outperformance in healthcare (XLV) during the first quarter, but the sector’s outperformance has now broadened and there is potential for upside to earnings due to the new drugs pipeline.

European pharmaceutical stocks also have a big U.S. dollar revenue exposure and usually do better against a stronger dollar backdrop, analysts said.

2. Utilities (XLU)

The sector has been doing well due to peaking rates and higher power prices because of strong gas prices, CO2 recovery technology, and artificial intelligence exposure.

“Our sector analysts expect another solid earnings season, with most companies tracking in line or above annual guidance,” wrote Analyst Mislav Matejka.

The sector is also trading cheaply, compared to fair value, and it is offering one of the highest dividend yields in Europe.

3. Real estate (XLRE)

The sector’s underperformance could turn around as bond yields move lower, data centers and industrial demand remain robust, and rental growth is strong, analysts said.

German residential sector is highlighted in the report due to a high level of excess demand.

The sector also trades cheaply compared to the market.

4. Staples (XLP)

Earnings for the sector during the first quarter came in stronger than expected, with improved volumes and resilient pricing.

“This, along with foreign exchange and some margin beats, have prompted our sector analysts to upgrade their EPS growth forecast by 2%, and expect further acceleration in [the second half of the year],” wrote Matejka. “They expect margins to improve this year, on clear volume recovery and on declining COGS (cost of goods sold).”

5. Telecommunications (XTL)

The sector’s balance sheets improved in the past few years, and it is now close to offering 17% free cash flow yield, well above the overall market, analysts said.

“A combination of better pricing and lower capex is helping the sector generate significantly better cash flows, underpinning the case for improving shareholder returns going forward,” wrote Matejka. “While our sector analysts have recently warned of a slowing in price increases in Q2, they do not expect this to alter the fundamentally positive case for the space.”