With growing concerns that a Greek exit from the Eurozone will continue to impact the FTSE 100, now may be the right time to switch into low-beta shares.
Beta is a measure of how responsive a particular share is to wider movements in the stock market index. Shares with a beta of 1 will generally move proportionately by the same amount as changes in the market index. And so, shares with a beta of less than 1 tend to move less strongly with changes in the market index.
Unilever’s (LSE: ULVR) focus on non-cyclical consumer products means that its revenues and earnings are less volatile to changes in the economy, because consumers tend to spend a similar amount on its products, even as their disposable incomes fluctuate.
But Unilever does earn a significant proportion of its earnings from Europe, particularly from Eurozone countries. A decline in the value of the Euro would have a significant impact to the sterling value of its earnings and dividends. So, although Unilever shares are less volatile to changes in index, Unilever may not be the best share to hold for fear of Grexit.
Unilever has a beta of 0.57 over the past five years.
Most utility companies have a beta of less than 1, but National Grid (LSE: NG) is particularly attractive because substantially all of its revenues come from regulated assets. Unlike electricity generation companies, like SSE (LSE: SSE) and Centrica (LSE: CNA), National Grid’s revenues and earnings tend be stable even as wholesale electricity prices and demand fluctuate.
National Grid has a five-year beta of 0.33.
Although not traditionally considered as a defensive share, Next (LSE: NXT) has a five-year beta of 0.55. This is because its sales has grown strongly despite constraints on household disposable income, and the popularity of the brand has continued to improve.
Next may be less volatile to changes in the stock market index, but Next is highly exposed to the dynamic fashion tastes. So far though, Next has been on the right side of fashion trends, with its underlying EPS climbed some 15% to 419.8 pence for the year ending January 2015.
Spreadbetting and CFD provider IG Group (LSE: IGG) thrives when market volatility is high, particularly with high profile news events. This is because retail traders believe that there are more short term opportunities during these times. But higher volatility can be a double-edged sword for IG, as much as it is for its clients.
Back in January, when the Swiss National Bank (SNB) suddenly announced that it would drop the exchange rate peg, the value of Swiss franc against the Euro soared by up 30% within a 24 hour period. Because traders use leverage to magnify their gains and losses, and positions could not be closed in time, its clients suffered huge losses.
As bad debts racked up, this also caused IG to lose up to £18 million from the single event. Nevertheless, IG believes it will eventually recover substantially most of its losses.
Since then, IG has reviewed the maximum leverage it can offer. The effects of Grexit is more likely to have a more gradual effect on asset prices, and to some extent, Grexit has already been priced into the value of the Euro and most financial asset prices.
IG Group has a five year beta of 0.47.