I’m looking for defensive FTSE stocks to buy as the global economy begins to struggle. Should I buy these blue chip shares to protect myself from a possible stock market crash?
Tesco
Food retailers are historically popular safe-haven stocks. Shoppers might cut down on more luxurious foods when times get tough. But we still need to eat and so companies like Tesco (LSE: TSCO) tend to enjoy above-average profits stability during downturns.
The scale of the current cost of living crisis means that this idea is being put to the test, however. Poundland owner Pepco Group said that it has seen Brits “scale back even on essential purchases in the short term” amid surging inflation.
I worry that Tesco could see sales of its foods and household goods slump alongside more discretionary items. It is also likely to lose increasing numbers of customers to cheaper chains like Poundland and B&M as shoppers try to stretch their shopping budgets.
Naturally Tesco can engage in huge rounds of discounting to stop revenues from slumping. However, the business has little wiggle room on this front given its wafer-thin profit margins. Tesco has already warned that adjusted operating profits are likely to fall this financial year (to £2.4bn-£2.6bn from £2.8bn) as it balances cost inflation with discounting.
Tesco’s market-leading online operation gives it advantages over its rivals in this era of increasing internet sales. But on balance I think the risks of owning Tesco shares are too great. And particularly as its rivals like Aldi, Lidl and Amazon steadily expand.
Fresnillo
Mexican silver miner Fresnillo (LSE: FRES) also faces risks in the near term as central banks frantically hike interest rates.
Precious metals prices strengthen in periods of high inflation. However, central banks are aggressively raising rates to curb the problem of frothy price rises.
The ECB’s decision last week to raise its benchmark rate for the first time in 11 years illustrates the drive that policymakers have to raise rates right now. If it continues the prices that companies like Fresnillo can ask for their product could sink (both gold and silver prices sank following the ECB’s announcement on Thursday).
That being said, I believe that Fresnillo remains a great safe-haven share for me to buy. The rate at which inflation could continue to rocket despite central bank actions. Besides, the ECB and its peers may have to stop raising rates if global growth comes to a standstill. This could provide silver prices with a welcome boost.
The ongoing war in Ukraine is also likely to support metal values over the short to medium term. A continued resurgence Covid-19 cases in China and the US could boost flight-to-safe demand for gold and silver too.
And in the longer term, prices of silver (and therefore profits at Fresnillo) should rise as investment in renewable energy rockets. The dual-role metal is a critical material in the manufacture of solar panels.
