Are "boring" sectors coming back?

Many investors prefer volatility, but there are still benefits to investing in both growth stocks and well-valued companies

The volatility of tech and artificial intelligence (AI) stocks has been a major factor in the market's up-and-down year. The CBOE Volatility Index (also known as the VIX), which gages the expected volatility of the stock market based on S&P 500 options, reached 35 in March (after the start of the war in Iran). Only the tariff unrest in 2025 and the start of the conflict in Ukraine have surpassed these levels in the previous five years.

So far this year, the S&P 500 has fluctuated between 6,317 and 7,794, indicating that its year-to-date returns have ranged from -7.7 percent to 13.9 percent. The performance of the large tech stocks that control the index is closely linked to these fluctuations. For instance, the price of Nvidia's shares has fluctuated between £164.27 and £236.54 thus far this year.

While not everyone enjoys volatility, some investors do. Retail investors invested more money in funds in June than in any other month since August 2021, according to the most recent fund flow data from the Investment Association, an industry association that represents UK asset managers. However, the majority of this money was allocated to defensive strategies like bonds or cash-like assets.

According to Simon Skinner, head of investments at asset manager Orbis Investments, "exciting investments have an unfortunate habit of becoming expensive precisely because everyone finds them exciting." "The crowd has typically arrived by the time the story becomes clear, and the price already reflects a great deal of optimism."

Watch the entire video here: Conventional, stable stocks and industries may have the opposite issue to so-called dull investments. According to Skinner, "expectations tend to be lower and valuations are often too if nobody wants to talk about them."

However, there is a case to be made for the dull stocks, particularly if you are attempting to protect your capital or produce a consistent income.

According to Kaylie Pferten, portfolio manager of Fidelity European Trust PLC and Fidelity European Fund, "some of the best long-term investments can be businesses that do relatively mundane things exceptionally well, generate cash consistently and compound that cash for shareholders over many years."

Where does volatility originate?

Certain industries have inherent volatility. "Where the gap between the story and the fundamentals can grow widest, volatility tends to be greatest," according to Skinner."

He cites technology as the clear example. "There is a lot of room for creativity in both directions because valuations frequently rely on profits anticipated many years into the future. Prices can drastically diverge from any reasonable assessment of value when a compelling story gains traction and investors pour in."

However, when capital is concentrated into a small number of correlated stocks, any slight threat to the optimistic narrativebe it disappointing growth numbers, capital expenditure, or returns on investmentcan quickly reverse this effect and take the majority of the market with it.

"Investors can rush out just as quickly when the story wobbles," Skinner continued.

Interest rates also have a big impact on technology. Interest rate assumptions are one of the most important factors when calculating present-day value based on future expectations.

David Cumming, head of UK equities at investment manager BNY Investments Newton, stated that "growth stocks tend to have more of their earnings further out than value stocks, because they're growing and the markets valuing that growth." The present-day value of these future earnings decreases in relation to other assets like bonds as interest rates rise.

As Skinner notes, periods of optimism in a few specific areas frequently coincide with current levels of market concentration, which are consistent with several of the biggest bubbles in history.

Skinner stated, "The problem isn't concentration alone." It focuses on a common story. What appears to be a diversified index may behave like a single trade when the assumptions underlying the valuation of a few very large companies are altered."

Which industries are less unstable?

Utilities, healthcare, and consumer necessities.

The most stable industries are typically those where demand is unrelated to the state of the economy or a compelling story, such as consumer staples, utilities, and the majority of healthcare stocks.

"In good times and bad, people still buy toothpaste, electricity, and medicine," Skinner stated. As a result, cash flows are, crucially, short-term and reasonably predictable. That makes it harder to be creative.

He continued, "It's hard to convince yourself that a water utility is going to change the world, but it's also hard to panic that it's suddenly worthless."

"Healthcare tends to go up when tech goes down," Cumming stated. The industry is "actually very cheap relative to history now, because it looks reasonably attractive because it's viewed as boring."

One of the industries most likely to profit from AI as end users is healthcare.

The Worldwide HealthCare Trust (LON:WWH), the iShares S&P 500 Utilities Sector UCITS ETF (LON:IUSU), and the Xtrackers MSCI World Consumer Staples UCITS ETF (LON:XWCS) are a few efficient ways to access these sectors.

Economics.

Although they are not the most attractive industry to invest in, banks can provide some protection under specific conditions.

Financials can provide protection as long as the economy is doing well, according to Cumming. "Only in the event of a recession do financials face difficulties."

However, under some circumstances, they may also be a source of volatility.

"Because changes in interest rates, credit conditions, and the economic outlook can have a disproportionate impact on profitability, financials can also be volatile, particularly more highly leveraged or complex banks," stated Stotzel.

Automotive.

Cumming claims that the automotive industry is "the most unloved sector in the world by far".

Volkswagen (FRANKFURT:VO), which presently trades at less than four times its projected earnings, is one of the companies he highlights.

He claims that "some of these stocks are wildly cheap," especially if the EU can protect the market from Chinese competition.

The argument for value and equilibrium.

Over longer periods of time and in the current year, the majority of the previously mentioned less volatile industries have underperformed tech.

That's not to say you wouldn't be happy to have them in your portfolio in the event that the tech rally reverses, but as long as tech remains dominant, any money invested in these sectors may actually reduce rather than increase your returns.

Sam North, a market analyst at the investment platform eToro, stated, "Balance should not mean abandoning growth." According to North, it is crucial to acknowledge that "no theme should dominate a portfolio indefinitely" and that "more predictable companies can reduce drawdowns, provide income and give investors capital to rebalance into growth assets during periods of volatility" even tho the long-term AI investment case is still strong.

It's also important to keep in mind that when thinking about defensive investments, you shouldn't just concentrate on the industry.

"We would be wary of assuming that every company in a traditionally defensive sector is automatically low risk," Stotzel stated. "Balance sheets are important, business models change, and even seemingly defensive companies can become vulnerable if they have excessive debt, poor cash generation, or an unsustainable valuation."

In addition to investigating defensive sectors, Skinner promotes considering the cost as the more long-lasting type of defense.

He stated, "It's important to separate risk from volatility." "A share price fluctuation is not always dangerous for a long-term investor. It's always overpaying for a business.

"You have a cushion if you purchase a share well below a reasonable estimate of what the business is worth," Skinner added. "Some bad news is already reflected in the price, so a fair amount can go wrong without permanently impairing your capital."

In a similar vein, Stotzel suggests focusing on business principles rather than industries to offer protection. "What protects investors in one downturn may behave quite differently in the next," he stated. "We believe that the qualities of the companies you ownstrong balance sheets, consistent cash generation, pricing power, and management teams that make prudent capital allocationsare more important for protection."