There’s no doubt it’s been a rough week for most UK investors since the EU Referendum results were announced last Friday. Many UK companies have seen their share prices slashed dramatically and the FTSE 250 index fell around 13% in the space of just two days. With so much uncertainty in relation to the UK leaving Europe, it’s a scary time for equity investors.
Having said that, one group of stocks has actually risen amidst the market volatility. I’m referring to are defensive stocks, also known as ‘non-cyclical’ stocks.
Defensive stocks include consumer goods, tobacco, utilities and healthcare companies. They produce goods and services that are needed irrespective of the economic cycle so their share prices may not suffer as much as cyclical companies during downturns. With the possibility of a UK recession on the horizon, demand for many defensive stocks has jumped this week.
Here are three key defensives that could provide you with portfolio protection.
Drinks champion
Drinks manufacturer Diageo (LSE: DGE) is seen as defensive due to the fact that people obviously consume alcohol during in both the good times and the bad. The owner of brands such as Johnnie Walker and Baileys sells its products all around the world and with significant emerging markets exposure, should offer some insulation from EU-related woes.
I’ve had Diageo on my watchlist for some time, waiting for a period of weakness to buy and thought this current volatility could present a buying opportunity. However much to my dismay, demand for Diageo shares has soared on the back of the Brexit result, with the stock jumping around 4.5% in two days.
That leaves Diageo trading on a P/E ratio of 21.3 times next year’s earnings which, given that the company’s revenues have stalled in recent years, looks a bit pricey to me. However with a 3% dividend yield, demand for this drinks manufacturer could continue to be high in the face of on-going market uncertainty.
Tobacco king
Tobacco companies are also seen as defensive as smokers will continue to smoke throughout an economic downturn. British American Tobacco (LSE: BATS) has spiked since Friday with high demand for the company’s shares.
It’s not hard to see why. Shareholders in British American Tobacco have enjoyed annual returns of 15% over the last five years and with market uncertainty reaching unprecedented levels, this is a stock that many investors will gravitate towards.
The tobacco giant currently yields around 3.5% and is trading on a P/E ratio of 18.9 times next year’s earnings. At that price it’s not cheap, but it’s likely that investors will be willing to pay a premium for the company’s defensive nature.
Consumer goods protection
Consumer goods companies such as Unilever (LSE: ULVR) aren’t exactly exciting stocks, however they can provide solid protection in a market downturn. While consumers may delay the purchase of a new car during a recession, it’s unlikely that they’ll stop buying soap or deodorant.
Unilever is another stock on my watchlist as the company has an excellent record of earnings and dividends growth. With a P/E ratio of 21.2 times next year’s earnings and having jumped around 4% post Brexit, Unilever is also trading at a premium, yet I expect this stock to be very popular in the coming months if the market uncertainty continues.
