With war having broken out in Iran, stock markets around the world are turning volatile. And FTSE 100 shares have been no exception. In fact, the UK’s flagship index even briefly dipped into correction territory last month.
Since then, large-cap stocks have partially bounced back. But is this just the calm before the real storm? And if so, how can investors protect their portfolios today?
Why the UK might be in serious trouble
With around 15%-20% of global oil & gas supply now disrupted due to the war, energy prices are surging, and Britons are already feeling the pinch at the petrol pump.
But it’s not just higher oil & gas prices that people need to worry about. Around one third of the globally traded fertiliser supply has also been severely impacted just as British farmers enter the biggest fertiliser application period of the year for winter cereals. And with April also the main planting season for mainline vegetable crops, the timing of this supply chain disruption is less than ideal.
Put simply, food and energy price inflation looks like it’s about to make a comeback. And with the economy already quite fragile, the risk of a recession’s rising.
Don’t panic
The economy’s in a tight spot. But the situation, while challenging, doesn’t guarantee a stock market crash. In fact, compared to most global indices, the FTSE 100’s actually far more insulated to the current headwinds. After all, most of its constituents operate in recession-resistant industries including energy, mining, defence, and healthcare.
At the same time, a large chunk of their earnings actually stems from international markets. As such, if the worst-case scenario does occur and the UK economy takes a tumble, many large-cap companies could comfortably absorb this impact.
Therefore, while the risk of a full-blown stock market crash is real, a correction seems far more likely.
Still, corrections can be painful. So what can investors do today to ensure their portfolios are better protected?
What the experts are doing
Beyond general diversification and ensuring portfolios are sticking within their risk-tolerance limits, institutional analysts are hunting for buying opportunities within all the ongoing market chaos. And here in the UK, several names are emerging as popular defensive favourites, including Unilever (LSE:ULVR).
The consumer brands powerhouse has been busy transforming and optimising its product portfolio to bolster profit margins over the medium term.
While the escalation of the UK cost-of-living crisis does create some headwinds, management’s being far more disciplined in its spending, including a recent hiring freeze and ongoing efforts to unlock significant operational savings.
As such, the analyst team at JP Morgan has just reiterated its Buy recommendation with a 5,700p share price target, implying a 36% potential upside from current levels even with all the external macroeconomic challenges.
However, while that certainly sounds promising, success isn’t guaranteed. Executing a large-scale transformation in the middle of an economic wobble is a challenging task. And with management pulling back on spending, it could make hitting earlier growth targets more difficult.
Nevertheless, for investors seeking shelter from wider market volatility, Unilever shares, while not risk-free, could indeed be worth considering in the current climate. And it isn’t the only defensive stock on my radar right now.
