BERLIN – With credit troubles roiling world markets and conventional wisdom pointing to the safety of bonds, some investors are wondering whether to stick with stocks at all — and if so, which ones. In such uncertain times, one trusted strategy is to invest in defensive sectors: the industries that supply the goods and services consumers need every day, even in recessions.
These industries include retail drug and grocery stores, makers of essential household products and popular beverages, and pharmaceuticals.
“Health care and consumer-staples stocks traditionally outperform the broader market during economic slowdowns and recession,” said Brian Belski, U.S. Sector Strategist for Merrill Lynch.
Defensive stocks, which outperformed in 2007, are expected to remain among the market leaders this year, according to Richard Bernstein, Merrill Lynch’s Chief Investment Strategist, who expects the economy to shrink throughout much of 2008. In that eventuality, many companies will suffer earnings declines, and investors will gravitate to defensive stocks with steady earnings, pushing up their prices.
As investors worry about declines in consumer spending, many stocks in the staples category have dipped to near all-time lows. But fears about slowing earnings in this sector seem excessive, Bernstein says. In fact, consumer-staples companies are recording healthy sales at home and strong growth abroad. In developing markets, incomes are rising, and millions of consumers are joining the middle class. For the first time, these new shoppers are demanding a broad selection of goods, including medical devices and packaged foods. That should help such U.S. companies achieve steady revenue gains and double-digit earnings growth.
Valuations of many health care stocks are also near all-time lows. To guard against losses in any one segment of the health care industry, investors should consider a wide range of stocks, including pharmaceuticals, biotechnology, life sciences and medical devices. Because many businesses in these fields are enjoying strong demand, they are able to raise prices. That should help to boost profit margins and earnings — even with the economy in a recession.
Talk to your financial advisor about whether investing in defensive-sector stocks is right for your portfolio.
(A Merrill Lynch Senior Financial Advisor, who can be reached at 410-213-8520.)