Predicting where the stock market isheading next is a bit of a mugs game youll find credible arguments for the FTSE 100 moving up, down and sideways.
If youre concerned that the Footsie could be heading down, but dont want to miss out on rising shares if youre wrong, backing companies in so-called defensive sectors can be a good strategy.
These companies shares tend to be less volatile than the market as a whole, and offer some protection when markets head down.
In the Great Bear Market of 2007-09, the FTSE 100 plummeted by 48% in less than 18 months between 12 October 2007 and 6 March 2009. Some shares suffered much larger falls butothersmuch smaller declines.
In the classic defensive sectors of tobacco, household essentials and big pharmaceuticals, British American Tobacco (LSE: BATS) (NYSE: BTI.US), Reckitt Benckiser (LSE: RB) and AstraZeneca (LSE: AZN) (NYSE: AZN.US) were the top shares for cushioning the bear market blow.
| Bear market performance |
|
|---|---|
| British American Tobacco | -4% |
| Reckitt Benckiser | -14% |
| AstraZeneca | -17% |
| FTSE 100 | -48% |
These three companies not only gave relative downside protection, but also continued to pay dividends. Furthermore, while the FTSE 100 is currently below its pre-bear-market level of 6,731, the three companies shares have comfortably surpassed the price they were trading at on the same date British American Tobacco is up 105%, Reckitt Benckiserhas gained85%, with AstraZeneca close behind with a rise of 83%.
Of course, theres no guarantee that these three shares will be the best performers in their sectors in the next downturn, but they should provide relative protection. And if thats what youre looking for, tobacco, household essentials and big pharma remain excellent sectors to be picking from.
Companies in these sectors typically trade on higher price-to-earnings (P/E) ratios than the wider market, but they merit higher P/Es because of their attractive characteristics.
At a share price of 3,582p, British American Tobacco trades on 16x forecast 2015 earnings. Also consider: Imperial Tobacco at 2,850p, P/E 14x (Great Bear Market performance -24%).
Reckitt Benckiser, at 5,390p, trades on 22x forecast 2015 earnings. Also consider: Unilever at 2,732p, P/E 20x (Great Bear Market performance -21%).
AstraZeneca, at 4,729p, trades on 17x forecast 2015 earnings. Also consider: GlaxoSmithKline at 1,407p P/E 15x (Great Bear Market performance -20%).
Finally, you can read a full analysis of three of the six shares above in this FREE research report from the Motley Fool’s leading analysts.
Two other highly attractive companies in defensive sectors — utilities and beverages — are also covered in the report. Such is the confidence of our analysts in the long-term prospects of these businesses that they’ve called the report “5 Shares To Retire On“.
This exclusive report is 100% free and comes with no obligation — simply click here and it’s yours.
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G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended Reckitt Benckiser Group. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
