I believe a recession, no matter how deep, is around the corner. Analysts at US investment bank Goldman Sachs expects it to begin in the fourth quarter and continue into 2023. Frankly, I don’t think anyone can be sure what the next two or three years will bring for the global economy. But with such a gloomy outlook, it may serve me well to get defensive now regarding my portfolio.
So here’s my pick of defensive FTSE 100 shares with the potential to generate positive returns amid negative economic growth.
Getting defensive
The widespread appeal of defensive stocks is that they usually outperform the market during recessions. Regardless of external events, their dividends, earnings and share prices should remain stable, often because they offer a product or service for which there’s consistent demand.
I find that these stocks are more resilient than others. That’s mainly due to the underlying business either holding a dominant market position or providing necessities to consumers.
The best FTSE 100 shares that embody these characteristics often benefit from ‘inelasticity of demand’. Basically, if they raise prices to tackle inflation, consumers will still buy the product or service.
Adding such shares should at least minimise some of the risks to my portfolio.
Best defensive FTSE 100 shares
Fortunately, the FTSE 100 is packed with some of the best defensive sector stocks for me to pick from.
The consumer staples sector is a good one at times like this. Consumers will always purchase food, household products, and — many of them — tobacco, regardless of financial means. Thus, consumer defensive specialist Unilever, and a notable dividend payer like British American Tobacco, are my favourite picks currently. The Unilever share price has fallen to a much greater extent than the FTSE 100 year to date. But I expect to see greater demand for the shares if overall business conditions deteriorate. Additionally, the British American Tobacco share price has remained steady this year despite the volatile market. The stock also tends to be one of the highest-yielding on the main market.
Telecoms is another one of my go-to defensive FTSE 100 sectors. Expansion into 5G and superfast internet means that a market titan like Vodafone is unlikely to see weakened demand, even if a recession strikes.
Shares than can perform in down markets
Rising inflation and interest rates continue to increase the risk of a full-blown UK recession. So the consistency of value-oriented FTSE 100 shares has become ever more appealing to me.
Some sectors such as the tobacco, consumer staples and telecoms segments that I’ve mentioned, are notable for having stocks where the underlying business performs consistently. This is regardless of changing economic conditions.
Additionally, the FTSE 100 is a global index. I feel that adding companies from it to my portfolio should provide a better hedge against a recession than FTSE 250 stocks can.
I feel that Unilever, British American Tobacco, and Vodafone should help my portfolio weather what I anticipate will be a tough winter for the stock market. This is why I plan to buy shares in all three stocks before the month is out.