With the coronavirus crisis continuing to ravage markets, it’s worth considering some defensive sectors that can withstand the damage
Defensive sectors for an unprecedented ISA season
The start of the new ISA season coincides with the stock market at lows not seen for over 10 years. For those seasoned investors who always place their allowance into the market at this time every year, they may see this as an opportune moment to set their money to work for them.
However, it’s difficult right now to know where to put that money to work most effectively. The current crisis is unprecedented and can’t be easily compared to other crisis events or economic downturns. For those investors who want to invest in the stock market, it may be worth considering how the current crisis is affecting both sectors and stocks. Judging by how stocks have fallen in the last couple of months, we can tell which sectors are going to face acutely troubling times.
No sector has been more severely impacted than the travel and leisure sector, and there are serious concerns about the viability of many companies, from airlines and holiday groups to cinema chains. Travel and leisure is a sector that we prefer to avoid at this time and only the very brave will be looking at some highly contrarian stock picks. Saying that, companies that survive this period may find fewer competitors on the other side, leaving large potential returns for courageous investors.
Our sector picks
Below we’ve listed some of our sector picks where the risk versus reward trade-off is less extreme, along with individual stock ideas for each one:
The classic defensive sector. Cash flows to the sector shouldn’t change too much given that we all still need to run our taps, heat our homes and run our computers and broadband routers now that we’re working from home. One of our preferred stocks in this sector is National Grid, a multinational electricity and gas utility company. They’re exposed to both the UK and the US and offer an indicative yield of just over 5%.
As this is a healthcare crisis, we will be demanding more of major drugs companies at this time to find a vaccine for the coronavirus. But not all drugs companies will be looking for a cure to this disease; they could be researching a whole host of other diseases instead. Even though economies are virtually shut, pharmacies are still open as we still need our medicines, making pharmaceuticals an indispensable sector. Our preference in this sector is multinational pharmaceutical company GlaxoSmithKline. In recent years, GSK has spent huge amounts on R&D to combat generic rivals, and subsequent new drug approvals have sold extremely well, with more in the pipeline. The shares offer an indicative yield just above 5% and would generally be considered low risk.
Whilst this is not a sector that you’d normally consider as defensive during a crisis, we’re still consuming materials. This will be important when the recovery comes, especially while China, the world’s major consumer, is getting back on its feet and reopening factories. In these uncertain times, it’s best to go for the safest option which, in this sector, we believe to be BHP Group, one of the world’s largest and most diverse mining groups. After previous commodity prices slumps, the company ditched low returning assets and dramatically cut back on costs, leaving it with a healthy balance sheet compared to the sector.
While restaurants and bars are closed, being cooped up at home while glued to our home computers means we may be looking forward to that refreshing drink more than ever. Diageo’s vast portfolio of brands will cover most individual’s tastes and needs. Its brands include Smirnoff Vodka, Johnnie Walker whisky and Tanqueray gin. Drinks companies have shown to hold up well during past recessions.
Companies in this sector have a huge variety of characteristics but we would view consumer credit company Experian as one that is more defensive in nature. Even at a time when business activity around the world takes a hit, Experian holds a huge amount of data on our financial backgrounds which will undoubtedly be needed as more individuals and businesses seek loans and other credit to get through the crisis.
Funds, investments trusts and ETFs
Not all investors will be brave enough to try and pick individual stocks in this environment. We are of the view that for those wanting to gain exposure to markets now, a more prudent route will be through collectives. If this is the case for you, we encourage you to take a look at our lists of preferred funds, investment trusts and ETFs.
All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.