FTSE defensives trading at new highs

The recent private equity bid to buy grocery giant Morrisons (LON:MRW) was a reminder of how appealing the UK supermarket sector is to some investors.

Private equity players tend to make these moves when they smell a value opportunity. But it’s also true that supermarkets – like other defensive stocks – have all-weather appeal because of their profitability and defensive dependability. And that’s something that attracts both professional and private investors alike.

Morrisons isn’t the only FTSE company currently in the sights of the PE firm in question: Clayton, Dubilier amp; Rice. The firm is also trying to buy healthcare advisory company, UDG (LON:UDG). Again, as a healthcare stock, UDG is in a defensive sector. And like consumer defensives, healthcare is an industry that hasn’t really been front-of-mind for many investors in recent years.

Defensive industries are usually less reliant on the economy because they sell goods that we buy in good times and bad. Pharma, tobacco, utilities and consumer defensives like supermarkets are good examples. Conversely, cyclical industries are sensitive to macro trends and the general health of the economy. They span the likes of mining, high street retail, home building and finance.

In recent years, low interest rates, good economic conditions and growing corporate earnings have created an environment that tends to suit cyclicals. Even last year – when the Covid-induced market crash sent investors reeling – defensive shares only momentarily came to the fore. The cyclicals that had long been in favour prior to the turmoil, quickly bounced back as confidence recovered.

Diversifying into defensives

Given that defensive sectors have been in the shadow of cyclicals in recent years, the private equity approaches for Morrisons and UDG are worth taking note of. If anything, it’s a reminder of the diversification advantage of having defensive exposure in a portfolio. After all, holdings in both sectors can help to spread risk and smooth returns as the mood of the market inevitably changes over time.

You can find Stockopedia’s sector directory here. But to get some ideas about shares in defensive sectors (consumer defensives, healthcare and utilities) that are currently trading close to new highs, here’s a screen that does that, and some of the results:

These defensives have all seen very solid price momentum in 2021 – not least the two takeover targets, Morrisons and UDG.

Defensives in demand

In the immediate aftermath of the market crash in early 2020, all eyes were on defensive stocks. Interest surged and their prices rose as a result. And while the market recovered well and cyclical shares bounced back, it was a reminder of why portfolio diversification between sectors can work well.

Defensive exposure in a portfolio can offer comfort in spells of uncertainty. And while these kinds of shares don’t always offer big upside in bull markets, they can find themselves in strong demand as investors gravitate to their more predictable nature. That seems to be something we’re seeing right now.

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