In early 2020, the pandemic outbreak caused the FTSE 100 to crash. Even though it eventually recovered, investors who had some defensive picks in their portfolios certainly had a smoother ride than others did. Given some concern around whether the UK market is due for another crash, here are two stocks to think about buying that did well last time the market was under pressure.
Running for safety
During Q1 2020, the FTSE 100 fell by 25.4%. In comparison, Fresnillo (LSE:FRES) rose by 3.5%. The precious metals miner saw strong demand as gold and silver prices surged. Investors sought safe-haven assets during periods of market stress, with precious metals having a strong historical track record of outperforming.
The intriguing part of buying Fresniollo as a defensive pick is that whatever the cause of the next crash might be, it’ll likely trigger a similar move to buy precious metals.
In some cases, mining stocks can outperform the metals’ price. This is due to the operational leverage that Fresnillo (and related companies) have. What I mean by this is that if the price of silver jumps 10% tomorrow, Fresnillo can immediately benefit from a higher selling price. Yet the cost of extracting the metal hasn’t changed from the previous day. So it can increase output, enjoy the higher revenue, and also enjoy higher profits in the short term due to fixed costs of production.
However, Fresnillo is a volatile stock. As the share price is correlated to commodity prices, it can experience sharp swings both higher and lower. It’s up 412% in the past year, but with a price-to-earnings ratio of 147, some might understandably see it as overvalued at the moment.
Benefitting from volatility
Another stock to consider is CMC Markets (LSE:CMCX). During Q1 2020, it rallied 22%. This was primarily due to the high market volatility, which drove a surge in retail trading activity. Given that CMC operates a retail trading platform, it was able to capture and benefit from these higher volumes. Profitability increased as it makes a small commission on each trade, so the more trades that occur, the more money it makes!
Again, I think this could do well regardless of the cause of the next crash. Irrespective of the catalyst, we’ll likely see higher volatility in both stocks and other asset classes. CMC has a broad product range that can be traded, suggesting it should outperform as client activity increases.
Further, it’s now a larger company than back in 2020. It’s expanded different partnership agreements, and in the latest half-year report noted that of the new account openings, “around 70% of these accounts are from European countries where we have no physical presence.”
One risk is higher competition. Other platforms catering to the same crowd have popped up in recent years, putting pressure on CMC to maintain market share.
Even with the concerns, I think both stocks are worthy of consideration by investors right now.
