How to choose defensive stocks to protect your portfolio in a volatile market?

The global economy is notably suffering after experiencing two very profitable years during the Covid-19 pandemic. Even though we understand that financial markets remain resilient in the face of tough times, there are several reasons why investors should consider bolstering their portfolio with defensive stocks while preparing for the next recession.

Leaving some defensive stocks in the share portfolio will help to hedge against potential risks and install a safety net in the event of a downturn in financial markets. A small proportion of your investments should be deployed there when you have a bullish stance on the future of equities, with more funds being allocated when bearish sentiment emerges.  

In addition, defensive stocks can inject some stability to your share portfolio when financial markets are volatile or when the economy is heading for a downturn.

Like safe havens, investors tend to start piling defensive stocks when bearish sentiment emerges which can help identify when the market experiences a change in mood. This applies the other way too, with an unravelling of defensive stocks suggesting investors are selling up as they have a greater appetite for riskier investment opportunities.  

Today, I would like to introduce five ASX-listed defensive stocks for your reference.

1. Bega Cheese – food and drink producer
2. Wesfarmers – consumer staple
3. Telstra – telecoms
4. AGL – energy
5. CSL – pharmaceuticals

1. Bega Cheese – food producer

Food or drink manufacturers and sellers are regarded as defensive businesses as people need to eat and drink regardless of economic performance. They often outperform the wider market during the downturn and can span a variety of sectors including those that produce the food, those that sell it, agriculture, ingredient suppliers, and so on.  

Bega Cheese is one of the largest companies in Australia’s dairy sector and the household name behind Australia’s iconic Vegemite. For the first half of the 2022 financial year, Bega Cheese reported its revenue to be up 113% to $1.5 billion against the prior corresponding period with earnings before interest, taxes, depreciation, and amortisation (EBITDA) up 48% to $97.2 million.

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2. Wesfarmers – consumer staple

General retailers that sell everyday products like Wesfarmers, Woolworth and Coles carry defensive qualities with low beta scores and reliable dividends. The Wesfarmers group owns one of the highest quality retail portfolios in Australia with strong in-demand brands including Bunnings, Kmart, and Officeworks.

While the company is facing the headwinds from the soaring inflation and cost pressure, from a long-term perspective, the services and products it provides remain firmly on top of the priority list for every single Australian family during the downtimes.

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3. AGL – energy

While many stocks' defensive characteristics spawn from their international reach and diversification, others get theirs through owning monopolies in crucial areas. Utilities providing electricity and water are heavily regulated businesses with limited competition in their markets.  

AGL Energy Limited is Australia's leading integrated energy company and the largest ASX-listed owner, operator, and developer of renewable energy. The AGL share price has outperformed the ASX 200 through 2022 so far and although the recent financial shows negative earnings per share, the company expects the EPS to return to positive in 2023 and move up steadily afterwards.

4. Telstra – telecommunication

Telecom companies and infrastructure managers secure income by providing necessary services on a contract basis. Phones, broadband and television are all seen as the basics for any household in a developed economy and signing people up on contracts means their revenue is more predictable.

Telstra is Australia’s largest telecom provider, which builds and operates telecommunications networks and markets voice, mobile, internet access, pay television, and other products and services. It is a member of the S&P/ASX with the largest market capitalization in the telecommunications sector. Telstra’s diversified and entrenched customer base provides the group with a stable revenue stream, making it one of the market’s favourite yield stocks for decades.

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5. CSL

Pharmaceutical companies are responsible for producing vital medicines and treatments and are often treated as a priority by governments and consumers. Due to this, their spending is not hastily cut down in the event of a downturn and the CSL is the third-largest company on the ASX with a market capitalisation of approximately $126.17 billion.

CSL is the third-largest company on the ASX, with a market capitalization of approximately $126.17 billion. The multinational specialty biotechnology company is also a market leader in the research, development and manufacturing of products that treat and prevent critical human medical conditions. The company is growing at a strong and steady pace and it has managed to grow its revenue at a rate between 7 to 15% during the past five years.

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