The Federal Reserve this week confirmed that its monthly asset repurchase programme (or QE) will end in October 2014. This is not a great surprise, as they have been tapering the programme since early in 2014. However, the bull market that began in 2009 has at least partly been aided by the repurchase programme, and there is a concern among many investors that, although interest rates are likely to stay low for a sustained period, an end to the programme could cause share prices to fall.
So, here are five stocks that could mitigate the fallout from a market correction.
Although BAE (LSE: BA) delivered a profit warning earlier this year, shares in the defence company have been fairly resilient and are down only 4% since the turn of the year. As well as being a defensive company by nature in terms of sales not being wholly dependent upon the macroeconomic outlook, BAE also has a beta of 0.9, which means that its shares should fall by 0.9% for every 1% fall in the FTSE 100. As such, it could outperform the wider market during a correction.
As an outsourcing group that focuses on food and facilities management, Compass (LSE: CPG) is more resilient to the economic cycle than most companies. Indeed, Compass delivered strong profitability growth even during the darkest days of the recession. Although shares in the company yield just 2.5%, their beta of 0.9 means that they could outperform a falling market. In addition, shares have performed well in 2014, being up 14%, which shows that market sentiment remains buoyant.
Although less defensive than BAE or Compass in terms of its business model, BT (LSE: BT-A) could still outperform the wider index during challenging periods. That’s because shares in the company continue to offer good value at current price levels, with BT trading on a price to earnings (P/E) ratio of 13, which is below the FTSE 100 P/E of 13.9. Therefore, there is scope for the discount to narrow before BT sees its share price fall considerably. In addition, a beta of 0.9 means that BT could prove to be a less volatile investment that the wider market.
Certainly, 2014 has proven to be challenging for Diageo (LSE: DGE), with Chinese growth prospects stuttering. However, alcoholic beverages tend to see market sentiment hit less hard than the wider market during a correction. That’s because demand for alcoholic drinks is usually fairly stable no matter what the situation is in the wider economy. As with all the stocks mentioned here, Diageo has a beta of less than 1 and could be a ‘go-to’ stock for many investors if the FTSE 100 declines.
Although sector peer, BP, showed that no oil company can ever be considered stable, Shell (LSE: RDSB) offers investors a level of diversification that few rivals can match. This should mean less volatility relative to peers in future. In addition, Shell offers a top-notch yield of 4.5% and has a beta of just 0.8. Although shares in Shell have performed well in 2014 (they are up 10%), they still offer good value and trade on a P/E ratio of just 11.5 – far less than the FTSE 100 P/E of 13.9.
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Peter owns shares in BAE and Shell.