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Your Money > Investing Comment Articles > Forward defensive
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By Richard Hunter, Hargreaves Lansdown Stockbrokers
For those interested in such random numbers, the UK market has now officially been in a bear market for a week - although investors will have noticed little change, since the bear market characteristics of pessimism and a lack of willing buyers have been features for some time. However, in a so-called traditional bear market, which are the safe havens investors look for and, indeed, which stocks have managed to outperform the 20% plus drop the FTSE100 has witnessed over the last year? Here we will consider just one asset class, namely shares, as opposed to those safe havens which investors would usually seek (and indeed have been seeking) such as gold and cash. Within the shares framework, defensive shares are usually the first place investors would look. These shares are ones which are less affected by the economic cycle on the basis that their "product" is one which consumers will need regardless of all else - food, energy, water and so on. This is not to say that the shares will not suffer or that their share prices may not drop - rather more that they are more likely to be somewhat insulated from the wider economic cycle. Whilst utilities have often been seen as a dour sector, their qualities nonetheless come to the fore in difficult economic cycles. Then there are those shares which, as the economists insist on calling it, have "inelastic demand", where the price of the product can continue to rise and yet demand remains virtually intact, such as tobacco shares. Also the pharmaceutical sector is traditionally a defensive stock, especially given ever increasing longevity within the global population, with specialist treatment needs. A quick glance over the FTSE100 performers over the last year therefore shows few surprises. Inevitably the mining stocks feature heavily, such as Rio Tinto (up 37%) and BHP Billiton (+11%), after the inexorable growth in demand from burgeoning economies such as China and India shows little sign of abating, whilst most metal prices have at some point over the last few months tested new highs. Similarly, the extreme spike in the oil price means that a number of oil and energy companies also feature on the list (for example, Tullow Oil (+46%), Cairn Energy (+40%), BG Group (+36%) and John Wood Group (+24%). Then there are the defensive staples such as British American Tobacco (+9%), United Utilities (+0.1%) and Severn Trent (-2%), BAE Systems (defence being another sector somewhat removed from the economy), up 2% and GlaxoSmithKline (down just 4%). There are also those industries which, quite simply, have watched the US sub-prime fallout pass them by and have benefited accordingly. For example, AMEC, the provider of engineering solutions in global infrastructure, saw its price rise by some 29% over the period. For the wider FTSE250, arguably a better barometer of the UK economy, a similar picture emerges. Whilst the index itself suffered a 26% drop over the last year, its top ten performing constituents were largely those involved either directly or indirectly in oil or energy, such as Wellstream Holdings (up 100%), AVEVA (+52%), Hardy Oil & Gas (+37%) and Dana Petroleum (+36%). Engineering, generators and even electronics also enjoyed a good representation, such as Chloride (+48%), Aggrekko (+24%) and Weir Group (+17%). Even though one would have perhaps expected a more difficult time for Stagecoach, the bus/rail/air travel company, it appeared that more individuals took to public transport given the higher oil price and the shares spiked some 34% over the period. Defence was represented by Chemring (+17%), and biotechs by Genus (+15%). Of course, such past performance is not guaranteed to be maintained. Nonetheless, these are actual performances based on defensive qualities which usually come into their own during times of volatility such as these. As the economic cycle improves - which of course may not be for some time yet - so the pendulum may swing back to recovery stocks and perhaps some of those sectors most mauled over the last year (such as banks and property shares). Nonetheless, access to defensive stocks remains an important part of an investor's armoury. Useful links: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
