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What are defensive stocks?
Defensive stocks are stocks of companies whose performance is relatively stable, regardless of the overall state of the economy.
Defense stocks produce goods and provide services for which demand has remained constant, regardless of the phases of the economic cycle. The most obvious example is consumer goods — these are essential goods for which demand is likely to remain constant even during an economic downturn.
During times of economic turmoil, many investors choose to invest directly in defense sector stocks to protect their capital, which in a sense serve as a "safe haven" for investments.
Characteristics of defensive actions:
What are defensive stock sectors?
To better understand the nature of defensive stocks, let's look at the defensive sectors in which these companies operate:
- Healthcare: One sector that comes to mind in this context is healthcare and the companies that work in it. Regardless of the economic cycle, people's need for medical and care services has remained.
- Consumer Staples: This is a term that refers to sectors that produce essential goods that we consume on a daily basis. Companies in this sector typically operate in sectors such as: food, beverages, alcohol, tobacco, household goods, and personal care products. These are all goods that have a stable demand regardless of the economic cycle.
- Utilities: These are companies that provide water and energy services. These services are vital, although their usage may decline during a prolonged recession – although demand should generally remain fairly stable, regardless of the broader economic picture and outlook.
- REIT: Real estate investment trusts (REITs) are companies that use investor funds to purchase and manage a portfolio of properties that generate income, such as from rental income. Investors should focus on REITs that manage apartment buildings, as paying rent is necessary to keep a roof over their heads. However, not all REITs are considered a “safe haven” for capital - some REITs specialize in developing and leasing office and industrial buildings - during a prolonged recession, the business can be at risk, which can also negatively affect the operation of such trusts.
Examples of protective actions
Below you will find some examples of protective actions:
- Coca-cola
- Procter & Gamble
- Walmart
- Costco Wholesale Corporation
- Johnson & Johnson
- United Health Group
UK defence stocks
Now that we've answered the question of what defensive stocks and sectors are, let's take a look at which UK stocks are worth paying attention to in 2024.
Diageo is a UK-based drinks company that operates in more than 180 countries worldwide and is known for some of the world's most recognizable and popular alcoholic beverage brands.
Its products include Johnnie Walker and Smirnoff, two of the world's four largest international spirits brands by retail value. Other notable product lines include Guinness, Tanqueray, Gordon's, Baileys and Talisker.
Alcohol falls into the category of consumer goods because it is a product that people tend to buy regardless of what is happening in the economy as a whole.
Over the ten years from 2011 to 2021, these UK defensive stocks have delivered shareholders an annual total return of 13%, significantly outperforming the FTSE 100 index of the UK's main stock index over the same period.
Source: Diageo Annual Report 2021 - FTSE 100 and Diageo Total Return. June 2011 - June 2021.
Defensive ETFs
For those looking to protect and grow their capital by investing during times of general market uncertainty, instead of choosing one or two defensive stocks to invest in, you can take advantage of the diversification opportunities offered by exchange-traded funds, or ETFs .
Defense ETFs use investors' money to invest in defense company stocks and other defensive assets, allowing an investor to spread their funds across multiple assets simultaneously with a single investment.
One example of such a defensive exchange-traded fund, or ETF, is the Consumer Staples Select Sector SPDR ETF . As the name suggests, this is a consumer staples ETF that focuses solely on buying stocks in companies that produce these types of products.
Source: Admirals MetaTrader 5 – Consumer Staples Select Sector SPDR ETF (XLP.US) W1 candlestick chart. Date range from October 25, 2015 to April 19, 2022. Please note that past data is not a guarantee of future performance.
At the time of writing, April 2023, the five largest companies in terms of market capitalization included in this ETF were:
Consumer Staples Select Sector SPDR ETF - Top Stocks
Source: State Street Global Advisors - Data obtained on April 19, 2023
Final word
Although many investors only think of defensive stocks during economic downturns, they can still be quite profitable over the long term. Jumping in and out of defensive positions while trying to time the economic cycle can often result in failure and can produce relatively lower returns than simply buying a specific company's stock and holding it for the long term.
The reliable, defensive industries we've highlighted in this article may seem less "exciting" than investing in trendy stocks you read about in the news.
While investing in the defense industries we covered in this article may seem less exciting than investments in, say, technology stocks, even one of the world's most successful investors, Warren Buffett, seeks out and invests in these types of companies, proving that these types of investments can pay off.
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Other useful information:
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer or solicitation to enter into any transactions in financial instruments. Please note that such analysis is not a reliable indicator of current or future market performance as market conditions may change over time. Before making any investment decisions, you should seek the advice of independent financial advisors to ensure that you understand the risks .
