When it comes to predictions regarding the future performance of the stock market, JP Morgan’s viewpoint that ‘it will fluctuate’ is probably the most accurate. After all, it is nigh on impossible to work out the direction of travel of the index – especially in the short run when economic data can cause wild swings in the FTSE 100‘s price level.
Looking ahead, it seems likely that additional fluctuations and, more specifically, volatile fluctuations will continue. That’s because we are at the beginning of a tightening of monetary policy following a handful of years of ultra-loose monetary policy that has been the driver of a stunning bull market which has seen the FTSE 100 more than double in six years. And, with the Chinese economy beginning to run out of steam, the prospects for stock markets the world over are highly uncertain.
As a result, it seems wise to invest at least a portion of a portfolio in defensive stocks that are likely to be less affected by the volatility that seems set to continue in the months ahead. One such stock is National Grid (LSE: NG). It has a beta of 0.9 and this means that its shares should fluctuate by a lesser amount than the wider index. Furthermore, their yield of 5.1% indicates that there is likely to be considerable support from investors in case of a prolonged downturn in the market.
However, where National Grid really appeals is in terms of its stability as a business. The UK and North America (where National Grid operates) will need electricity in the short, medium and long term and this means that, while growth prospects are somewhat disappointing (National Grid is forecast to increase its bottom line by just 1% this year, for example), it remains one of the most consistent and reliable performers in the FTSE 100, which could be worth a great deal to investors moving forward.
Similarly, water services company, United Utilities (LSE: UU), is a very appealing defensive play. As with electricity, demand for water is likely to remain very stable and consistent so that no matter what the economic backdrop, United Utilities should post strong returns for its investors. Clearly, its earnings growth is unlikely to match that of a cyclical company during prosperous years but, with a yield of 4.6% and dividends that have risen by over 5% per annum during the last five years, United Utilities remains a core stock for the long term.
Meanwhile, the sale of tobacco is also utility-like due to it being a staple product for around 20% of the UK’s adult population. As such, Imperial Tobacco (LSE: IMT) is also a very stable performer, with its earnings having risen in four of the last five years at an annualised rate of almost 5%. Looking ahead, improved growth is forecast, with Imperial due to increase its bottom line by 13% next year and, with there being scope for significant pricing improvements, its profitability should remain high despite pressure from declining volumes.
Furthermore, Imperial has a beta of just 0.9 (which is the same as that of United Utilities) and also yields a very enticing 4.5%, thereby making it a sound defensive option that looks set to beat a volatile FTSE 100 in the months and years ahead.