Are the so-called “defensive stocks” as safe as people say?by Andy Davis / September 21, 2011 / Leave a comment
Published in October 2011 issue of Prospect Magazine
For all the volatility in equity markets over the summer, a few themes have held good—the gold price keeps rising, bank shares keep falling, and wherever you look, people keep saying: “Buy defensive equities.”
Gold is becoming a core retail investment option. For the first time in one regular survey, as many British retail investors (38 per cent) say they intend to buy gold as to buy dividend paying shares. The decline in bank shares is happening for two good reasons: developed economies are slowing and their banks hold a lot of government bonds that are worth less than had been assumed. But what about the call to buy defensive shares? Can something so widely repeated as an investment nostrum for troubled markets be relied upon?
Defensive shares are those of robust companies in industries such as food, drinks, tobacco, utilities, pharmaceuticals and telecoms. The arguments in favour of owning these shares are well known: they pay steadily rising dividends and are generally able to prosper through a downturn because their customers have little choice but to carry on buying. I definitely buy the theory. The problem is that I’m not sure the model is going to work so well in the next little while.
For a start, a surprising amount of spending that we used to consider non-discretionary is looking increasingly optional. Take southern Europe, which is further down the road of economic slowdown and austerity than we are: companies in areas such as drinks and tobacco have seen consumers trade down in droves. Price wars have broken out and some prestigious brands have suffered big reversals at the expense of cheaper rivals. Even in Britain, supermarkets report pressure on their food sales. I think we’ll see more of that in the months ahead, and that makes me think twice about buying defensive stocks.
Also, governments are fond of defensive sectors for the same reason as investors. Profits from products that consumers have to buy are reliable sources of t…