However, moving forward, many analysts are now neutral on defensive plays, owing to yield compression. Instead, they are setting their sights on cyclical stocks that appear to be more appealing in terms of valuations.
"The year 2012 has been one of risk aversion and defensive plays. Paradoxically, defensive assets such as REITs, dividends stocks and bonds, have outperformed growth stocks and even small-cap stocks in some instances," says Gan Eng Peng, Hwang Investment Management Bhd's head of equities.
"This is due to the massive liquidity pumped into the system, which resulted in a frantic search for yield. Broadly speaking, defensive equities have charted returns of 30% to 40% YTD," explains Gan.
British American Tobacco Malaysia Bhd, one of the defensive stocks that was not expected to see capital appreciation, went up nearly 19% to RM59.30 on Dec 18, after retreating from its record high of RM65.50.
Carlsberg Brewery Malaysia Bhd surged 50% over the year to end at RM2.80 on Dec 18. Nestle Malaysia Bhd rose 13.6% to RM63.84 and its rival, Dutch Lady Industries Bhd, saw its share price more than double to RM45.54.
Among the REITs, Pavillion REIT closed 24.8% higher and Sunway REIT was up 17.6%. Meanwhile, DiGi.Com Bhd has gained 38.3% since the start of the year.
According to Alliance Research, defensive stocks, which make up half of the FBM KLCI component stocks, lent support to the benchmark, while high beta stocks weighed down the index.
On a broader note, the upcoming election, which has raised political uncertainties, has made Malaysia a less favourable investment destination, despite the flow of funds into Asia.
The FBM KLCI has lagged behind regional indices. Many primary Asian indices posted double-digit growth this year, such as the Thai Stock Exchange Index and the Philippine Stock Exchange Index, which had grown 32.9% and 28.2% respectively as at Dec 18.Worldwide, the same investment pattern was observed, with more money flowing into defensive assets, particularly bonds. "The overwhelming interest in defensive stocks has made them less attractive now," says Philip Capital Asset Management chief investment officer Ang Kok Heng, who finds that many growth stocks are trading at attractive valuations.
He points out that the yields of many traditional defensive stocks on Bursa Malaysia have declined to 3%, while the REITs, which used to offer 7% to 8%, have dropped to about 5%. However, he still believes that defensive plays will remain the main theme in the equity market. "Investors will still stick with defensive counters to seek shelter amid uncertainties."
Furthermore, Ang believes the low interest rate environment will be conducive for putting money into defensive stocks although the yields have shrunk substantially.
Looking beyond the election, analysts are anticipating a reinvigoration of the Malaysian bourse, while a mild improvement in the global economy is expected to encourage the return of risk appetite for cyclical stocks.
"Going into 2013, the return of growth is forcing portfolios to shift into growth stocks and cyclical markets. This has seen some weakness in defensives lately and strong performance in growth and cyclical stocks," says Gan.
With all signs pointing to a continued recovery in the US and China and a stable eurozone, we think this trend should continue, he adds.
Alliance Research favour sectors that will benefit from government expenditure and consumer spending. "We are 'overweight' on the construction and oil and gas sectors," says the research outfit.
"Regardless of the election results, we believe investors will switch from defensive stocks to cyclical stocks post-election, although the timing will depend on the results," says Alliance Research.
The gaming sector has been assigned an "overweight" rating as liberalisation is expected to be a re-rating catalyst for this sector, especially post-election, it says.
Alliance Research also has an "overweight" rating on the glove sector in view of resilient demand, easing latex costs and dissipating concerns over aggressive capacity expansion.
This story first appeared in The Edge weekly edition of Dec 24-31, 2012.