Let us be clear. The risks to the economic recovery are rising. In October, the UK economy barely grew on a month-on-month basis. This is indicative of the fact that the economy is still struggling. And the numbers could get worse in the coming months. The Omicron variant is not good news, and if we go back into lockdowns, it could tell on FTSE 100 companies’ health. High inflation is creating cost pressures for them anyway. Moreover, withdrawal of policy support could impact sectors like mining and real estate, which have a prominent place in the headline stock market index.
FTSE 100 defensives to the rescue
To me, this implies that we could potentially see both a weak economy and weak stock markets in 2022. For that reason, I think that defensive stocks could find favour again. Defensives are those stocks whose fortunes are impacted relatively less by economic cycles because they cater to our basic requirements. These include sectors like healthcare and utilities.
I hold a number of safe FTSE 100 stocks in my investment portfolio already. But it is a no-brainer to me that these should rise as a proportion of my overall investments. So even if stocks more sensitive to coronavirus-related developments fluctuate, my portfolio can remain steady.
High and sustainable dividend yields
Importantly, a number of these stocks have decent dividend yields as well. Utility stocks’ yields for instance, range between 3.5% and 5%. The average FTSE 100 yield is around 3.5% right now, so these offer at least as much. This is important to me because inflation is quite high right now, so a healthy dividend yield allows me to earn a positive real return on my investments.
Moreover, these dividends are likely to be sustainable. That is not something I can say for FTSE 100 stocks with the highest dividend yields today. These include the likes of multi-commodity miners and tobacco stocks, as examples. Miners are expected to see some softening in demand next year, which could impact their financials and their dividend levels. Tobacco stocks’ long-term future is in question. This means that I will have to watch these investments more actively than others, and exit from them if required. Typically, neither of these two situations arises for the likes of utility stocks, which tend to have predictable financial outcomes.
The flip side
There is of course the possibility that next year might turn out to be great not just for the UK but for the global economy. The Omicron virus might not turn out to be as big a threat as it seems right now. Growth might pick up pace and inflation could be brought under control. If that happens, and a large chunk of my investments are in safe FTSE 100 plays, I could miss out on a fair bit of capital growth and maybe even higher dividends from recovery stocks. But on balance, I think with rising risks they could be great no-brainer stocks to buy for now. As the situation evolves, perhaps I could tweak my investment plan.
