In troubled economic times – such as right now – we often hear talk of investors taking a flight to quality. Nevertheless, it’s still worthwhile for investors to hunt for stocks to buy.
The theory behind flight-to-quality observations is that investors overall begin to shift their asset allocation away from risky investments and into safer ones.
Therefore, if the general economic outlook deteriorates, investors may choose bonds and cash savings instead of shares, for example.
The case for sticking with shares
But it’s all a load of nonsense really. And the term flight-to-quality can go in the dustbin along with all those other stock market phrases that sound so catchy but have little practical value.
After all, super-successful investors such as Warren Buffett don’t bail out of stocks every time the economic storm clouds blow overhead. In fact, he tends to do the exact opposite and buys the shares of quality businesses. And the uncertain outlook is often the thing that creates the good-value entry price.
On top of that, notions such as flight-to-quality fly in the face of a long-term investment mindset. And there’s a real risk of achieving diminished returns by trying to be too clever with timing.
But that’s not all. Sometimes so-called ‘safe’ assets prove not to be as robust as expected. For example, the bond market has been volatile. And that’s caused problems for institutions heavily invested in the asset class.
However, there’s mileage in targeting the stocks of businesses with strong quality attributes right now. Many have seen their share prices stand up quite well despite the weakness in the financial sector.
A two-pronged approach
And one tactic worth exploring is to take a two-pronged approach to building a portfolio. On the one hand, there are quite a few beaten-down stocks with alluring value characteristics on the market. But why not balance them with a handful of quality operators that have just demonstrated their resilience in these troubled times?
Several evergreen companies have defensive operations and tend to perform well despite general economic volatility. For example, I think it’s worth investors to consider biopharmaceutical enterprises AstraZeneca and GSK.
And in the world of fast-moving consumer goods, why not dig in with further research on Unilever and Diageo? They both generate stable cash flows from their powerful and well-known brands.
In the energy sector, National Grid is almost always worth considering. And there’s tempting defensive growth potential available with Coca-Cola bottler Coca-Cola HBC AG.
But outside the FTSE 100 we can find several other attractive businesses with defensive characteristics. For example, Britvic is a soft drinks operator with strong brands.
However, it’s important to carry out thorough research before diving into any of these stocks. Even businesses with quality characteristics, a runway for growth and a fair valuation can run into operational problems from time to time. And it’s possible to lose money on stocks like these even when holding for the long term.
Nevertheless, I’d put these seven at the top of a list for investors’ consideration.
