Uncertainty currently characterises global markets, which influences investment decisions, portfolio allocations and trading strategies due to the potential volatility, often warranting a shift to defensive assets to protect portfolios.
There is currently uncertainty over the US election outcome and the potential policies that either Vice President Kamala Harris or former President Donald Trump will implement should they win the November election.
There is uncertainty over the trajectory for global inflation and interest rates and the lingering threat of a recession. Investors are also unsure about how long the tech-driven equity boom can last, and there is constant uncertainty around the geopolitical landscape and the potential for various conflicts across the globe to escalate or spill over.
Amid the prevailing conditions and dynamics at play, market commentators and analysts are advising investors to brace for volatility.
To shield themselves from swings or a market downturn in a volatile market, investors typically rotate out of growth stocks and assets that perform well in stable environments, opting to boost their exposure to defensive assets to rebalance their portfolios by adding some protection.
From an equity perspective, defensive stocks are typically companies that can grow earnings no matter the stage of the market cycle.
These companies have durable operations that can keep growing in either tough or favourable conditions, exhibiting little sensitivity to the economic cycle.
As defensive stocks generally experience smaller price swings than the broader market, they can help balance riskier elements in a portfolio to minimise the overall impact of market volatility and create a more balanced risk profile.
These companies typically operate in essential industries like consumer staples, such as companies selling everyday necessities like food, drinks and household goods.
What are defensive assets and how can they protect your portfolio?
Uncertainty currently characterises global markets, which influences investment decisions, portfolio allocations and trading strategies due to the potential volatility, often warranting a shift to defensive assets to protect portfolios.
There is currently uncertainty over the US election outcome and the potential policies that either Vice President Kamala Harris or former President Donald Trump will implement should they win the November election.
There is uncertainty over the trajectory for global inflation and interest rates and the lingering threat of a recession. Investors are also unsure about how long the tech-driven equity boom can last, and there is constant uncertainty around the geopolitical landscape and the potential for various conflicts across the globe to escalate or spill over.
Amid the prevailing conditions and dynamics at play, market commentators and analysts are advising investors to brace for volatility.
To shield themselves from swings or a market downturn in a volatile market, investors typically rotate out of growth stocks and assets that perform well in stable environments, opting to boost their exposure to defensive assets to rebalance their portfolios by adding some protection.
From an equity perspective, defensive stocks are typically companies that can grow earnings no matter the stage of the market cycle.
These companies have durable operations that can keep growing in either tough or favourable conditions, exhibiting little sensitivity to the economic cycle.
As defensive stocks generally experience smaller price swings than the broader market, they can help balance riskier elements in a portfolio to minimise the overall impact of market volatility and create a more balanced risk profile.
These companies typically operate in essential industries like consumer staples, such as companies selling everyday necessities like food, drinks and household goods.
These companies include Procter & Gamble (PG-NASQ), Nestle (NESNZ-TRQX)), Unilever (ULVRL-TRQX), Coca-Cola (KO-NASQ), PepsiCo (PEP-NASQ), Costco Wholesale Corporation (COST-NASQ), Colgate-Palmolive (CL-NASQ) and Reckitt Benckiser Group plc (RKTL-NASQ).
Companies that provide essential services and utilities like electricity and water are not affected by shifts in consumer and business demand because these are non-discretionary expenses. Examples of these stocks include NextEra Energy (NEE-NASQ), Dominion Energy Inc (D-NASQ), National Grid (NGL-TRQX) and Engie SA (ENGIP-TRQX).
Various healthcare stocks are also considered defensive for similar reasons, as people cannot go without medication or medical devices just because the economy is struggling.
Pharmaceutical companies like Pfizer (PFE-NASQ) Sanofi (SANP-TRQX) and Merck (MRK-NASQ), companies the develop medical devices, such as Johnson & Johnson (JNJ-NASQ) and Medtronic (MDT-NASQ) , and healthcare service providers like UnitedHealth Group Incorporated (UNH-NASQ) offer suitable options for a defensive allocation in investment portfolios.
Defensive stocks that offer steady earnings and reliable dividends can also offer additional stability and income during volatile times or in a recession, even if stock markets take a knock.
The US dollar is widely considered a defensive investment asset as it is the global reserve currency for numerous central banks worldwide. This status signifies global trust in the large, robust and diversified US economy and its deep and liquid financial system.
As such, buying and holding US dollars can help diversify investment portfolios and reduce overall risk exposure, particularly during volatile times.
The qualities also make the US dollar a preferred safe-haven asset, alongside gold and government bonds. While the terms defensive and safe-haven are often used interchangeably, a safe-haven asset is usually one that investors flock to in times of extreme market stress or uncertainty, whereas defensive assets generally offer downside protection.
While defensive stocks offer valuable protection, it’s important to remember they typically come with lower growth potential compared to growth stocks. It is important to allocate capital to defensive stocks according to your individual risk tolerance and overall investment objectives.
Information correct at time of publishing. It is important to conduct thorough research and analysis using a combination of fundamental and technical analysis techniques to make informed trading decisions. Additionally, consider your risk tolerance, investment objectives, and time horizon when assessing company performance for trading.