With the EU referendum less than a month away, there’s a realistic chance that Britain could exit the EU. Whether you think this is a good or bad thing, the chances are that in the short term at least, the FTSE 100 will fall. That’s because investors tend not to like uncertainty and with Britain exiting the EU being an unprecedented event, it would be likely to cause a degree of fear in the short run.
As such, buying defensive stocks could prove to be a wise move. While many cyclical stocks may be hit hard, companies with robust and resilient business models may outperform their index peers as investors seek a perceived store of wealth.
The great defender
One company which offers excellent defensive attributes is National Grid (LSE: NG). Its business of transmitting energy across the UK is unlikely to be significantly affected if Britain leaves the EU and so its financial performance is likely to remain as expected, whatever happens in a month’s time. This idea seems to have been latched on to by the market since National Grid’s share price has risen by 6% since the turn of the year.
In addition to a defensive business model, National Grid offers excellent income prospects. For example, it currently yields 4.5% and with dividends forecast to beat inflation over the medium term it’s likely to remain a firm favourite with income-seeking investors. Furthermore, with National Grid having operations in the US, it may be better diversified than many of its utility peers.
Stability play
Also offering a sound defensive profile is SSE (LSE: SSE). The provision of domestic energy is a very dependable business in which to operate and with SSE also offering excellent income potential, it ‘s likely to prove popular among investors if Britain exits the EU.
With SSE currently yielding 5.9%, it provides an excellent income return in the short run. If the FTSE 100 was to fall following Brexit, this cash flow could provide the company’s investors with a means of taking advantage of discounted share prices, with dividends from SSE having the potential to be reinvested elsewhere. And with SSE having a beta of just 0.8, it should offer a less volatile shareholder experience over the short run than the wider index.
Magnificent Severn
Meanwhile, Severn Trent (LSE: SVT) remains a top-notch defensive buy. That’s because the provision of water services is one of the most stable and consistent industries in which to operate. Clearly, the liberalisation of the water services market is a potential cloud on the horizon, but with Severn Trent apparently ready for it, the company’s financial performance seems unlikely to suffer.
Alongside its defensive qualities is bid potential, since Severn Trent has been the subject of takeover attempts previously. While they’re not guaranteed in future, low interest rates could make infrastructure companies such as Severn Trent highly appealing to potential suitors and push the company’s share price higher.
