My defensive FTSE 100 stock picks for volatile markets

The FTSE 100 has recovered about 80% of the slump it saw in March. That is the good news. But the cause of the slump, the Russian invasion of Ukraine, is sadly ongoing. The coronavirus pandemic is not yet over either. Concerns about inflation and central bank policy are still with us.

There are plenty of potential causes for further FTSE 100 volatility from the Ukraine to Covid, and inflation.

Not all indexes are created equal

There are no certainties in investing. However, in times of turmoil, large-cap stocks tend to do better. The FTSE 100 has performed positively over the last three years, one year, and the last six, three, and one months. The FTSE 250, which consists of more UK-focused mid-cap companies and the smaller, speculative FTSE AIM 100 index, have had more mixed fortunes.

Table 1. Price changes of UK stock market indices over various timeframes

As the table above shows, large-cap stocks look like they handle volatile markets better than others. Yet the FTSE 100 is not immune to volatility. Indeed I started this piece by pointing out that the UK’s leading index had seen a recent slump, albeit one from which it has partially recovered.

Defensive FTSE 100 sectors

Investing convention distinguishes between cyclical, sensitive and defensive sectors. The latter classification includes the consumer defensive, utilities and healthcare sectors. Stocks in these sectors tend to be less volatile and react less dramatically to broader market declines than stocks from other sectors.

But that does not mean that defensive sectors always shine. There is a trade-off to be made. Let’s look at the ‘beta’ metric, which measures a stock’s expected reaction to broader market moves. When a stock has a beta of one, it tends to behave on par with the market. A beta of more than one means the stock amplifies market moves. Finally, a stock with a beta of less than one tends not to move as much as the broader market, be that up or down.

Defensive stocks typically are low-beta shares. So, the possible protection I get in market declines might be offset by these stocks underperforming when the FTSE 100 is rising. Still, I think a basket of these stocks in my portfolio is worth the trade-off.

Tesco, a consumer defensive, and GlaxoSmithKline, a healthcare stock, have some of the lowest daily volatilities of all FTSE 100 stocks at 1.55% each, plus low betas of 0.69 and 0.61, respectively. British American Tobacco (beta 1.06) and Diageo (beta 0.64) — both consumer defensive stocks — and SSE (beta 0.635), a utility stock, are other examples that come with lower-than-average volatility than other stocks in the FTSE 100. These five also pay dividends that help boost returns.

Table 2. Analyst forecast 2023 dividend yield for my top 5

The lower historical volatility and betas of these stocks might not hold going forward. However, I would consider adding these five large-cap defensive stocks to my portfolio today for their potential to protect it when stock markets are volatile.