The FTSE 100 index has had a good run over the last decade, delivering healthy total returns to investors. Yet, as we approach 2020, there are dark clouds on the horizon.
For example, in recent weeks, the International Monetary Fund (IMF) has advised that the global economy is now in a “synchronised slowdown,” while the UN has warned that a recession in 2020 is now a “clear and present danger.” In addition, according to data from Smart Insider – which analyses company director share transactions – sales by insiders are running at their highest level in 20 years (i.e. since the tech bubble) which suggests corporate profits could be peaking.
Of course, no one knows for sure how the stock market will perform in the short term. However, in this kind of environment, it’s sensible to think about portfolio protection. With that in mind, here are two ‘sleep-well-at-night’-type FTSE 100 stocks I believe could provide an element of protection against stock market turbulence.
Consumer goods giant Reckitt Benckiser (LSE: RB) is the perfect stock to own in the event of an economic downturn or stock market decline, in my view. The reason I say this is that many of the group’s products, such as Nurofen painkillers, Dettol cleaning products, and Mucinex cough medication, are relatively immune to economic conditions. People are still likely to buy these kinds of products during a recession.
Just look at how Reckitt shares performed during the Global Financial Crisis (GFC) a little over a decade ago. As the FTSE 100 index tanked from around 6,700 points to around 3,500 between mid-October 2007 and early March 2009, a decline of nearly 50%, Reckitt’s share price only fell around 15%. In other words, it outperformed the index by a wide margin, providing investors with considerable portfolio protection.
Currently, Reckitt trades on a forward-looking P/E ratio of around 17.4 and sports a prospective dividend yield of around 2.9%. I see those metrics as good value for this portfolio protector.
I’d also back Unilever (LSE: ULVR) to provide protection in the event of a global economic downturn. Like Reckitt, it owns a top portfolio of trusted consumer goods brands including Dove, Lipton, and Domestos. This means it should be able to generate relatively consistent profits and continue paying dividends, no matter what happens to the economy. It also outperformed the FTSE 100 by a wide margin during the GFC.
The last time I covered Unilever shares in mid-July, I thought the stock was fully valued. It was up nearly 25% year to date, and was trading on a forward-looking P/E of 22.6. However, in recent weeks the share price has pulled back significantly as the pound has strengthened and, as a result, the P/E has fallen to around 20.9 and the yield on offer has risen to around 3.1%. I think those metrics are reasonable given Unilever’s ability to generate stable earnings and dividends throughout the economic cycle.
Given the dark clouds on the horizon, I think it’s a good time to be buying the stock.
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Edward Sheldon owns shares in Reckitt Benckiser and Unilever. The Motley Fool UK owns shares of and has recommended Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.