The FTSE 100 fell further this week as global stock markets continue to suffer. US analysts are attributing the downturn to artificial intelligence (AI) overspending, compounded by the ongoing trade war with China.
But while the majority of issues are American-born, the rest of the world is not immune. The Footsie is particularly sensitive, with much of its revenue stemming from the US.
When President Trump first announced trade tariffs in April, the market dipped 10% in a matter of days. Now we could be seeing a repeat of that action — with the added weight of overvalued AI tech stocks.
How to prepare
Step one in preparation is not to panic. Feeling calm? Good, then on to step two.
No doubt you’ve heard the saying, “time in the market beats timing the market“? Its deceptive simplicity masks a deeper meaning. Aside from supporting a long-term investment outlook, it also reinforces the concept of not trying to buy low and sell high. Research has shown that the vast majority of traders fail to profit from this strategy.
However, it can be wise to rebalance funds into defensive shares during volatile times. Doing so can reduce risk without entirely exiting the market, thereby not missing out if the downturn is short-lived.
Essentially, its a strategy that covers all bases.
Where defensive stocks fit in
Defensive rebalancing is a good way to reduce risk during a downturn without exiting the market. Unlike growth stocks and income stocks, which are usually defined by the company, defensive shares are defined by their sectors.
Common ones include utilities, consumer staples and healthcare — products and services that remain in high demand even when money is tight. In addition, strong brand loyalty, pricing power and a dominant market position add defensiveness.
One key benefit of the FTSE 100 is that many of its defensive shares also pay dividends. In this way, investors can reduce their risk without completely eradicating returns. By contrast, growth stocks are usually never defensive as they have a higher risk of volatility.
One stock to consider
It may seem ironic to invest in the London Stock Exchange Group (LSE: LSEG) when markets are wobbly, but the company has a history of resilience. Aside from managing the exchange, it provides users with access to a wide range of financial services like trading platforms, data, and analytics.
For the past 20 years, the price has enjoyed slow and steady growth, up 618%, with dividends growing at an average rate of 12.63% a year.
Understandably, there’s been moderate dips during market downturns but still, volatility is low. It’s also in a relatively unique market position, with a wide economic moat, consistent demand and limited competition.
However, there’s a risk that AI could render some its service obsolete. It’s still uncertain how that might look but analysts are already pricing in the potential impact.
Subsequently, the price has dropped 24% this year, which is concerning — but also gives it extra room to climb when (if) the market recovers.
For risk-averse investors, now may be a good time to consider resilient businesses like London Stock Exchange Group – among others. As always, a diversified portfolio of stocks from different sectors is critical to help reduce localised risk.
