I am looking for FTSE 100 defensive stocks as part of my current investment strategy. This comes after the Bank of England (BoE) increased the base rate to 1% last week. In doing so, it confirmed my worst nightmare as an investor — that we are likely to see double-digit inflation, which will negatively affect growth of the British economy.
What are defensive stocks?
One of the primary appeals and characteristics of defensive stocks is that they tend to outperform the market during economic downturns. No matter external events, their dividends, performance, and share prices usually remain relatively stable.
But why is this, you might ask? This is because they offer a product or service that has consistent demand. Now, this could be for a few reasons. They could have a dominant market position. Or, they could have a positive presence, profile, and reputation for value for money. Alternatively, the product or service could be a bare necessity that is in demand no matter the economic outlook.
Defensive stocks are often referred to as safe havens. For example, in current times, soaring inflation and rising costs mean many businesses may need to raise prices. Defensive stocks will still continue to sell their products because they are essential or dominant.
I am looking to invest in defensive stocks to protect my hard-earned cash from inflation and I want to do this with minimal risk. Here are some of the sectors I consider defensive as well as some FTSE 100 stock options I’m considering within these sectors.
FTSE 100 consumer staples and healthcare
First, I am looking at consumer staples. Companies in this sector sell essential products and services. These types of products include food, household products, and even tobacco.
Three FTSE 100 stalwarts in the consumer staples sector include AB Foods, Unilever, and British American Tobacco.
Next, I am looking at the healthcare sector. A bit like food, the demand for healthcare products and medical treatments is consistent, despite the economic picture. Furthermore, for healthcare businesses, there are financial incentives to develop new drugs too.
The Covid-19 pandemic shone a new light on the healthcare sector. I would argue demand for these types of stocks as defensive options is higher than ever.
Two FTSE 100 examples of defensive healthcare stocks are pharma giants GlaxoSmithKline and AstraZeneca.
FTSE 100 utilities and telecoms
The next sector I am looking at is utilities. The need for electricity, gas, and water will never cease. It must be noted that the current risk-reward ratio has changed due to a focus on transitioning towards renewable energy, as well as global climate change goals. If you add to this the geopolitical events involving Russia, a major provider of fossil fuels, this is potentially the least appealing to me for my holdings currently due to the aforementioned risks.
An example of a FTSE 100 utility stock is National Grid.
The last sector I am looking at is telecommunications. Consumer demand for mobile phones and broadband products remains consistent in developed countries and is only increasing in developing countries. The expansion into 5G and superfast internet connectivity could boost stocks in this sector.
Two FTSE 100 examples of stocks in this sector are telecom giant BT and Vodafone.