Predicting where the stock market is heading next is a bit of a mug’s game — you’ll find credible arguments for the FTSE 100 moving up, down and sideways.
If you’re concerned that the Footsie could be heading down, but don’t want to miss out on rising shares if you’re 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… but others much 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.
| Â | 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 Benckiser has gained 85%, with AstraZeneca close behind with a rise of 83%.
Of course, there’s 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 that’s what you’re 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%).