With the EU referendum less than a month away, many investors may be feeling somewhat nervous regarding the prospects for the FTSE 100 and the UK economy. This is entirely understandable since there’s a real possibility that Brexit might happen, which could cause the investment community to become increasingly risk-off in the short run.
In such a scenario, owning defensive stocks could be a sound move. That’s because they’re likely to be less positively correlated to the performance of the UK economy, which means that their profitability is less dependent on the macroeconomic outlook than is the case for many of their index peers. As such, defensive stocks could become increasingly popular over the short-to-medium term and buying them now could be a means of outperforming a volatile index.
Positive growth outlook
One stock that appears to fit the bill in terms of its defensive characteristics is pharmaceutical business AstraZeneca (LSE: AZN). Certainly, its bottom line has disappointed in recent years due to the loss of patents on blockbuster drugs. But with AstraZeneca embarking on a takeover spree, its long-term profit growth outlook is relatively positive.
Furthermore, AstraZeneca’s future financial performance is more dependent on the performance of its drugs in clinical trials than the performance of the UK economy. And with it having a beta of 0.9, AstraZeneca should provide a less volatile shareholder experience, which could prove to be a useful attribute if the FTSE 100 becomes highly volatile following Brexit.
Reasonable price
Also offering an outlook less positively correlated with the UK economy than most of its index peers is Smith & Nephew (LSE: SN). It has the added advantage over most stocks (including AstraZeneca) in that its business model is very consistent and reliable. In fact, Smith & Nephew has been able to increase its earnings in each of the last five years and with earnings growth of 2% pencilled-in for this year as well as 12% for next year, investor sentiment towards the company could improve.
That’s especially the case since Smith & Nephew trades on a price-to-earnings growth (PEG) ratio of only 1.4, which indicates that its shares offer strong growth prospects at a very reasonable price.
The Baxalta issue
Meanwhile, Shire (LSE: SGP) has a rather less certain future than many of its pharmaceutical peers. That’s because it recently agreed to a $32bn acquisition of Baxalta and while this positions the company for long-term profits growth, there are concerns that synergies won’t be met and that the two companies will fail to integrate as successfully as hoped.
Clearly, such concerns are often present during major mergers and acquisitions. However, Shire’s PEG ratio of 0.9 indicates that they seem to be priced-in, with it having a relatively wide margin of safety. And with the company having a strong pipeline of new treatments, it could prove to be a star performer even if Brexit causes uncertainty in the short run for the FTSE 350.
