Backing defensive stocks may pay off in medium term
Mixed data emanating from the US has turned decisively weaker, with non-farm payrolls, ISM manufacturing and non-manufacturing all missing market expectations last week.
On top of this, concerns over the impact of the end of the US stimulus package along with the renewed flare-up in fears around peripheral sovereign debt in Europe provide further near term uncertainty.
A recent research piece by the Investment Bank Morgan Stanley highlights a number of reasons to buy defensive stocks.
They argue that macroeconomic newsflow is likely to be weak in the coming months which will likely weigh on risk appetite.
This data should leave investors searching for stocks that provide greater certainty of earnings in more uncertain times, which should allow defensives to outperform.
In addition they note that many defensive stocks remain cheap and under-owned yet earnings growth expectations are close to a record low compared to more cyclical names. Defensive sectors include the Pharmaceutical, Food, Tobacco and Utilities.
A number of well known defensive names are Danone, Unilever (maker of Dove, Knorr & Flora) and Imperial Tobacco (maker of John Player & Rizla).
These companies all benefit from attractive valuations, significant geographical diversification yet provide a strong and stable dividends for investors.