While the FTSE 100 gained a boost from the Conservative election victory, its medium-term outlook may be somewhat uncertain. That’s because, while the UK economy is performing well, the EU referendum could take place next year and, between now and then, the political and investment outlook could change immensely.
Defensive Stocks
For example, the debate surrounding the yes/no question has the potential to cause serious upheaval in the Conservative party. That’s because it remains split on the European question (as it has done for many years), with there being a very real prospect of unrest among backbenchers should the concessions negotiated by David Cameron prove to be insufficient. And, with the prospect of the UK ending up outside of the EU unlikely to improve investor sentiment, defensive stocks such as GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) could be a great place to invest.
Clearly, GlaxoSmithKline’s future growth prospects have a relatively low correlation with the political events and economic outlook for the UK economy. So, there is a good chance that it will outperform the wider index moving forward, as investors seek out defensive stocks. Moreover, GlaxoSmithKline has a bright future, with an improving pipeline and major cost reductions having the potential to return the company to bottom line growth next year after a handful of challenging years.
Another excellent defensive play is Smith & Nephew (LSE: SN). Unlike GlaxoSmithKline, it has an excellent track record of earnings growth, with its bottom line having risen in each of the last five years and averaging growth of 5% per annum during the period. And, looking ahead, it offers relative stability due to consistent demand for its wound care, endoscopy and orthopaedic products, with its bottom line due to rise by as much as 13% next year.
International Exposure
Another company that may see investor sentiment improve over the medium term is WPP (LSE: WPP). While the UK is a key market for the company, it is very much an international play and is often viewed as a barometer of the global economy. And, with the US economy going from strength to strength and China also initiating a series of interest rate cuts in an attempt to stimulate the economy, WPP could see its profit rise at a brisk pace over the next couple of years. And, with it trading on a price to earnings (P/E) ratio of 16.4, it seems to offer good value for money, too.
Also having little reliance upon the UK economy is global mining play, Glencore (LSE: GLEN). Its share price is much more closely linked to the price and outlook for commodities rather than whether the UK remains in the EU or not. And, with it having a strong management team and a dividend yield of 4%, investor sentiment in the company could improve moving forward. That’s especially the case since Glencore currently pays out just 52% of profit as a dividend, which indicates that there is considerable scope for improved income levels moving forward.
