By - Kunal Sawhney
Summary
- The current economic environment has created investment opportunities for many who can now buy defensive stocks at low investment.
- Defensive stocks are companies that carry good dividend pay-out record and better stability with respect to earnings, presenting investors a safe long-term investment during a volatile market
- Sectors such as oil and gas, transportation and capital goods and construction boast of many defensive stocks that kept performing amid the pandemic struck economy.
The 2019-2020 financial year had been extremely volatile for the stock market globally because of US-China trade war and a fear of an impending recession with the second half reeling under the impact of COVID-19 Pandemic. During such economic milieu, the stock market which was performing steadily, including Australian Stock Market that experienced an all-time high in February was dealt with a severe blow with the stocks declining heavily in the month of March.
Many investors who had been capitalising on the bullish market have hit the sack with investments taking a beating as the market crashed. The current economic environment is still uncertain with lockdowns and rules on social distancing again becoming less relaxed and being extended due to resurgence of COVID-19 cases in Australia. However, such a turn of events always creates opportunities.
Defensive stocks can be identified as stocks providing high dividend payout with a positive EPS. While a dividend payout demonstrates stable operations, a positive EPS signifies a profit making company. When the market is volatile, investors prefer stocks that have good dividend payout record and better stability. Let’s cast an eye on stocks of Oil and Gas, Aviation, and Capital Goods that have been reeling under pressure due to the economic down turn, and these sectors are way down in the list of current market participants or so it seems.
Oil Sector
Most of the oil businesses are primarily risky business which requires heavy capital investments and their earnings are directly correlated to the oil prices. The Pandemic had slashed oil demand and excess supply hit the market and, in the process, saw the oil prices hit historic low levels. To abate the excess supply problem, OPEC+ swung into action and cut production to balance the oil market demand and supply dynamics. Oil stocks plummeted to a massive low during the March bear market. However, since then the prices have gone up though considerably when compared to where they were trading in April.
We can see from the following chart that Oil Search Limited (ASX:OSH), Woodside Petroleum Limited (ASX:WPL), Yancoal Australia Limited (ASX:YAL) and Santos Ltd (ASX:STO) are mid cap companies delivering a positive EPS and dividend payout amid the pandemic driven recession time.
With economies opening worldwide and manufacturing industries coming back to production, the demand for oil is rising with Brent and WTI both witnessing a surge. IEA expects global output to recover in 2021 by 1.7 mb/d.
Transportation
The transportation sector had been hit hard as Australia announced lockdown and closed international borders in the month of March. This led to a crash in passenger traffic at the airport and airlines. The Aviation and transportation stocks were hit hard and saw their stock prices crashing in the bear market. Mid-cap stocks such as Qantas Airways Limited (ASX:QAN) and Sydney Airport Ltd (ASX:SYD) also declined and are currently trading 36.33% and 33.13% lower than a year before, respectively.
With economies opening up and business activities experiencing an uptick, travel related to businesses at the domestic level along with tourism may see a surge. As Australia is expected to keep its borders closed till mid-2021, international tourism and travel are yet a distant dream. However, with the trans-Tasman travel expected to be executed by September, this sector could see some hope going forward.
Capital Goods and Real Estate Developers
The performance of capital goods is linked with how the manufacturing sector is faring as the sector serves the manufacturing companies primarily. The manufacturing sector is dependent upon how the economy is faring. The stronger the economy, the better is the performance of manufacturing sector and the capital goods industry. The pandemic related lockdowns and social distancing rules had a deep impact on the manufacturing sector and the construction activities, impacting the capital goods industry and the real estate sectors.
The March bear market casted its shadow on the Capital goods industry and real estate profoundly with md-cap companies such as Downer EDI Limited (ASX:DOW), Stockland Corp (ASX:SGP) and Lendlease Group (ASX:LLC), trading way below their levels a year back. These companies have a good dividend payout history. With opening of Australian economy, the construction sector market and capital goods sector could see some revival.