FTSE 100: best defensive stocks to watch as Israel-Hamas war simmers

FTSE 100 investors, over the longer term and as a general rule, see lower returns than those investing in the S&P 500. One of the underlying reasons for this is that the US index relies on delivering outsized capital gains derived from corporate growth, while the UK index is filled with matured businesses usually looking only to deliver reliable dividends.

This is, of course, a generalisation. But in times of heightened geopolitical tensions, the FTSE 100’s defensive stocks can be attractive to ride out the storm. And with fears rising that Israel is on the verge of a ground offensive into the North of Gaza, potentially drawing Iran into a regional conflict, the UK’s defensive stocks could be popular choices.

Israel-Hamas war updates

The Israel Defence Forces conducted an overnight ‘targeted raid’ in Northern Gaza using tanks last night, striking ‘numerous terrorist cells, infrastructure and anti-tank missile launch posts.’ Israel’s Prime Minister Netanyahu has made clear that this is ‘only the beginning’ and that the country is continuing to prepare for a ground invasion — but without giving any timeline.

The World Health Organisation has urged Hamas to release its more than 200 hostages on medical grounds, and the UN is warning that Gaza will run out of fuel in a matter of hours, creating a crisis within the Strip’s hospital system. However, Israel has countered with accusations that Hamas is stockpiling fuel.

Separately, UN Secretary General Antonio Guterres — while calling the attacks by Hamas ‘appalling’ — has come under fire from Israel for saying that they did not happen ‘in a vacuum’ as there had been ’56 years of suffocating occupation.’

While EU leaders are expected to call for a pause in fighting to deliver humanitarian aid, US President Biden has now noted that this is no going back to the status quo between Israeli and Palestinians ‘as it stood on 6 October.’

The Hamas-run health ministry in Gaza considers that almost 6,500 people have been killed in Gaza since 7 October — the initial attacks on Israel by Hamas saw more than 1,400 killed.

FTSE 100 defensive stocks

Defensive stocks are companies which are expected to generate reliable revenue and profits regardless of the wider economic environment. This can be because they have a strong reputation for value for money, a dominant market position, or perhaps because they sell consumer essentials.

Accordingly, FTSE 100 defensive stocks benefit from a concept known as ‘inelasticity of demand,’ thus making them ‘safe havens.’ In other words, these companies can raise prices to match inflation, and consumers will continue to buy their products. This makes them less susceptible to geopolitical risk such as a regional Middle East war — but remember, past performance is not an indicator of future returns.

The insurance sector, including Legal & General and Aviva, is perhaps the most popular for defensive investors, due to the generally larger dividends and well-covered dividend yields on offer.

Consumer staples companies include Tesco, AB Foods, Unilever, British American Tobacco and Imperial Brands are also common choices — food and tobacco remain in constant demand regardless of any wider macroeconomic fears, and these companies can increase prices to match inflation when necessary.

The healthcare sector FTSE 100 stocks such as AstraZeneca and GSK can also be viewed as defensive, given that demand for medical treatments remains constant. However, biotechs can be more volatile than other sectors as much of their value is derived from new treatments and not every clinical trial is a success.

Telecommunication FTSE 100 shares are also popular due to the consistent consumer demand for broadband internet and phones — with both BT and Vodafone strong candidates for their wide economic moats in their respective categories.

Finally, utilities stocks are perhaps the ultimate defensive sector. Demand for water, electricity and gas is extremely reliable, and companies including Centrica and National Grid are effectively irreplaceable within the sector. However, it’s worth noting that these companies are usually strictly regulated, which sometimes includes limits on shareholder payouts.

But overall, the FTSE 100 has a significant selection of defensive stocks on offer.