Why I’m looking at Diageo shares amid growing geopolitical risks

I believe this FTSE 100 (INDEXFTSE:UKX) share could help investors weather cloudy days in the markets.

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What could make an investment account worry-proof? This question is becoming more relevant as headwinds threatening the global economy are gathering pace. 

Geopolitics matter

Geopolitical events affect financial markets both in the UK and globally. And equity markets worldwide are facing a cocktail of risks now, leading to constant ebbs and flows in investor sentiment.

The biggest global headwind is the US-China trade war. President Trump has plans to increase tariffs on all imports from China, while China is allowing its currency weaken to help its exports.  Worryingly, the trade war may also end up becoming a tech war as protectionism takes hold in many countries.

Furthermore, Hong Kong has suffered weeks of political protests. Naturally, this uncertainty has led to further choppiness in the Chinese and Hong Kong stock markets.

Also earlier in August, many investors have noticed the big drops in the Argentinian peso and shares. The decline is due to the unexpected results in the country’s presidential primaries. Markets are now pricing in the possibility that a more protectionist government will take power in Argentina toward the end of the year. As a result, credit-default swaps have spiked. And if this important cog of the Latin American economy fails, global shares cannot avoid the ensuing volatility.

Brexit deadline approaches

On the home front, investors may expect even more global turbulence as we get ready for Brexit with the EU departure date set for October 31. It’s probably the understatement of the decade to say that Brexit has so far been wildly unpredictable! 

And it has not exactly been a hot August for the FTSE 100 as well as the pound. Economic growth has taken a hit in the UK and markets have been suffering from a bad case of the jitters! We may even have a snap election that could complicate the Brexit process further.

In other words, markets in the UK and worldwide may be entering a period of an unprecedented reactionary environment. While it’s almost impossible for the average portfolio to completely avoid the impact of market declines, it is possible to minimise it by adding stocks that are more defensive in nature.  

Drink our way through uncertainty?

Year-to-date Smirnoff-to-Guinness giant Diageo (LSE: DGE) is up about 17%. The shares are hovering around 3,450p and offering a dividend yield of 2%.

Expensive yes, but the group’s performance this year reminds me how both during and since the worst of the 2008/09 financial crisis it had handily outperformed many FTSE 100 shares. There may be few consumer products as recession-proof as alcohol, as people tend to drink in both good and bad times alike.

The strong brand names owned by Diageo give management pricing and competitive power within this non-cyclical market. Geographic diversification – especially into emerging economies, where consumers are increasingly showing brand loyalty – also provides a relatively defensive investment opportunity.

The tens of millions of new members of the middle class across the developing world constitute an increasingly lucrative market. For the year ended 30 June, the company delivered strong net sales growth of 6.1%. Markets in Asia Pacific, Latin America and Africa all contributed strongly.

If Diageo can continue to pivot towards these growth markets and maintain 30%+ operating margins, the shares could belong in most portfolios despite the trailing P/E ratio of 26. I’d be a buyer of the stock at any dip.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

tezcang has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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