I think it’s fair to say that there’s a lot of uncertainty in the market at the moment. In contrast to much of the past two years, this isn’t being primarily driven by the Covid-19 pandemic. Rather, rising tensions in Eastern Europe are providing investors like me with a lot to ponder. With this in mind, here are some defensive stocks that I’m thinking of buying to help protect me during the coming months.
Investigating defensive stocks
Defensive stocks refers to companies that typically outperform growth stocks during recessions, periods of uncertainty, and times of concern. It’s not necessarily the case that defensive stocks will shoot higher during a recession. However, when compared to the rest of the FTSE 100 index or a specific sector, these type of stocks should perform better.
The main characteristic that makes this the case is the inelasticity of demand. This economic term refers to the fact that consumer demand for the products or services offered doesn’t really change based on different factors. For example, even if the price of a pint goes up by 10p, my demand won’t be altered in buying a beer. Or even if the economy is performing badly, my demand will be unchanged on buying bread from the supermarket.
This attribute also helps during times of market uncertainty. Investors can be confident that despite much of what’s going on, revenues should remain high. I feel this applies for utility companies, supermarkets, and some financial services companies.
Stocks that I like now
To this end, there are several good examples that I’m thinking of buying now. Firstly, I’d consider adding consumer goods providers such as Unilever and Reckitt. These companies own well-known brands in a variety of sectors, including Dettol, Strepsils, and Lipton.
Both share prices are up over the past year, 14% for Unilever and almost 5% for Reckitt. As for a risk, supply chain disruptions is a negative here, given the fact that these goods need to be manufactured and shipped around the world.
I’d also include some insurance companies such as Legal & General and Aviva. Services such as home and car insurance, along with pension provision and investment management, are constant needs for most of us. I therefore think both companies can offer me gains if things remain uncertain this year. Aviva shares are up 9% and Legal & General is down a modest 3% over the past year.
Another benefit of these defensive stocks is the dividends on offer. Both stocks have a yield in excess of 5%, which can provide me with good income. This is helpful especially during tough times in the market.
As a risk, market volatility could be a negative for the pensions funds managed, given that these proceeds are likely invested in the stock market.
Jon Smith has no position in any firm mentioned. The Motley Fool UK has recommended Reckitt plc and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
