Stock markets around the world have achieved record highs in the first half of 2021. However, it may seem like the distant past, but before the pandemic many analysts were predicting the next stock market crash may be just ahead.
Now that the world is returning to some sort of normality, attention has again returned to the question of when the next downwards correction may occur. US markets in particular look to be at unsustainably high valuations, and that means it could be time for investors to start considering how they want to position their portfolios for a potential stock market crash.
Sometimes unpopular with growth-oriented investors, the FTSE index is actually stuffed full of defensive stocks that can be expected to hold up well in the case of a general market fall. Here we take you through 5 stocks which can add a good layer of defense against the danger of a market crash wiping out your portfolio’s valuation suddenly.
5 FTSE Stocks to Buy for a Stock Market Crash
Unilever shares are currently riding high – they have risen 14% in the last 3 months alone. However, this is not why Unilever has been included in this list. Unilever is included here because the stock has a fantastic record of holding up very well when the general market is declining.
Unilever is one of the largest consumer goods groups in the world, and therefore can expect to see revenue streams stay fairly strong even in times of recession. Everyone needs the household goods Unilever sell, and when you purchase Unilever stock you are in effect purchasing a slice of this steady and predictable stream of future earnings. In essence, Unilever has the size, steady income, as well as the past record to suggest it can navigate any market slumps ahead.
The recent bids by international private equity groups for Morrisons has been a big confidence boost for the UK retail sector. Tesco’s itself is probably too large to be acquired in the same way that Morrisons and Asda have been, but Tesco’s share price has drifted higher recent on this good news for the whole sector.
Tesco’s stock could be well worth including in a portfolio positioned for a potential market crash for several reasons. Firstly, like Unilever Tesco’s revenues are relatively constant and stable. Recession or not, people do their household shopping and only tend to make minor savings here.
Secondly, Tesco’s have shown that they can live with and compete against the so-called ‘budget’ supermarkets. Again, this suggests a market crash won’t leave too many consumers too poor to shop at Tesco’s. Thirdly, Tesco’s have committed to off-loading their operations in Thailand and Malaysia.
Whilst this does suggest lower growth than these emerging market adventures could have produced, it does leave the firm with less debt, and therefore a stronger balance sheet ready to weather the next financial storm.
3. National Grid
The gold standard of defensive stocks will always be the mighty utilities sector! Utilities are renowned for providing a more consistent revenue stream than most other sectors. Defensive stocks from the utilities sector can generate income over and above share price increases, and they often deliver the best dividends even in bearish markets, National Grid are effectively a monopoly in the UK power distribution network, and they have operations in North America too.
National Grid have missed out on the recent dramatic rally, and the share price has actually only gained 6% over the last year, but this is missing the point about defensive stocks! They aren’t going to massively increase in value under any market conditions, but likewise they will never plummet in value, and they almost never cut or reduce their dividends. Currently, the shares yield just over 5%, and these payouts don’t look to be in doubt any time soon.
4. BAE Systems
Part of the objective in rebalancing your portfolio for a stock market crash is to reduce the impact of volatility on your portfolio. If you think a market crash is heading down the tracks, you can use defensive stocks to protect against losses both because they have high dividend yields and because their valuations will fall less than growth stocks.
In this sense, defensive stocks can hedge the losses you might experience in other parts of your portfolio. BAE Systems is one of the world’s leading global defense, security and aerospace engineering companies. They produce military hardware for numerous governments including those of the US, UK, Saudi Arabia, and Australia.
If the past 18 months have shown investors anything, it’s that developed world governments have deep pockets and an almost unlimited ability to borrow and spend. Defense spending may not be top of the agenda right now, but it is a constant item on every government ‘to-do’ list, and BAE have shown they are capable of netting a good share of this spending globally for decades now.
BAE are responsible for upwards of 100 new inventions annually, and BAE designs and develops products in areas as diverse as life support and naval combat systems. As such, their earnings are not solely reliant on defense spending, although this is the largest share of their revenues.
5. Smith & Nephew
Finally, no collection of stocks for a stock market crash would be complete without a healthcare pick. Similar to many of the sectors discussed above, healthcare is usually seen as a ‘recession-proof’ investment. Smith & Nephew are a UK-headquartered multinational medical devices manufacturer.
Smith & Nephew produce a wide range of medical technology, but their main specialism is joint replacement systems and other orthopaedic devices. In this field they have developed and patented several products which they have been able to market globally and very successfully.
Importantly, Smith & Nephew look to have a strong position in a market that is only going to expand as the developed world’s population ages and need more and more treatments of this type. As such, Smith & nephew look like a rock-solid dividend payer of the resent and future, whilst looking unlikely to suffer too much in a market correction.
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