The Defensive Sectors In Vogue Amid COVID-19 Pandemic

  • March 19, 2020 03:23 AM GMT
  • Team Kalkine
The Defensive Sectors In Vogue Amid COVID-19 Pandemic

The defensive sector usually represents companies whose business model are comparatively immune to changes in the economic conditions. Their offerings are usually essentials in all kind of economic cyclicity.

What are Defensive Stocks?

Those businesses are said to be defensive in nature whose financial performance have a comparatively lesser correlation with the economic cycles. Their sales, profit and margins remain stable regardless of the economy, and their stock prices also remain mostly immune against big swings in the broader market.

The defensive sector comprises of businesses like utilities, health, hygiene and personal care and other consumer staples, where demand for these company’s offerings remain more or less same regardless of economic conditions.

Utilities Sector vs FTSE All-Share

The utility industry represents a group of companies which provide basic services, including electricity, water, sewage services, and natural gas. Despite being highly regulated businesses, these companies earn profit as their offerings are key essential for human survival.

Even in an economic slowdown they perform better than other businesses, as one can skip watching movies in the movie theatre, cancel their travel plans, stop going out for lunch or dinner, curtail or completely discard luxury shopping amid the economic slowdown, but has to pay electricity bills to get electricity supply, water bills and sewage cleaning services, Â as these expenses are bare essentials for human survival and one cannot defer them for future.

As utility businesses play a crucial role in our day to day life, they are considered defensive in nature. Â They account for approximately 4% of the FTSE All-Share total market -capitalisation and about 4.6% of the FTSE 100 total market-capitalisation.

Amid, prevailing downturn across the globe because of the outbreak of novel COVID-19, financial markets slumped across the globe. The major indices across the globe are hitting multiyear lows and registering new 52-week lows every other day in past over a couple of weeks.

Investors are high and dry still, the utility companies are sustaining the blow amid bloodbath in the equity market, presenting a firm defence.

The FTSE All-Share represents a bunch of shares listed and traded on the main market of the London Stock Exchange; it has so far plummeted around 35% from its 52-week peak level of 4,264. In a month-over period, the FTSE All-Share slumped by over 33%, gave up about 27% in the past 10-days and about 16% in the past five trading sessions.

On the same time, the FTSE All-Share Utility stocks have relatively outperformed their benchmark by average around 15% of positive return. Not only that but many have also significantly outperformed against their benchmark FTSE All-Share and FTSE 100 index. Several names including the likes of Pennon Group PLC – a UK-based water utility business, whose share’s showed relative outperformance against the benchmark index and returned 40.5% over the past 4-weeks and 63.3% over the past 13-weeks, respectively.

A list of FTSE All-Share Utility stocks’ relative performance amid market crash

Utility vs FTSE All-Share Rel. Price Perf.
Company Name GICS Sub-Industry Name Benchmark Relative 4-week Price PCT Change Benchmark Relative 13-week Price PCT Change Benchmark Relative 26-week Price PCT Change YTD Price PCT Change 1-year Price PCT Change
Pennon Group PLC Water Utilities 40.5% 63.3% 109.0% 9.6% 42.3%
Severn Trent PLC Water Utilities 38.9% 49.3% 72.4% -1.0% 20.0%
ContourGlobal PLC Power Producers & Energy 37.4% 30.5% 28.3% -20.4% -5.2%
National Grid PLC Multi-Utilities 33.6% 51.2% 63.0% 0.4% 7.0%
United Utilities Group PLC Water Utilities 32.7% 48.8% 69.6% -0.8% 7.6%
Renewables Infrastructure Group Ltd Renewable Electricity 10.4% 14.6% 13.2% -27.2% -13.4%
Telecom Plus PLC Multi-Utilities 6.7% 10.2% 30.2% -26.8% -26.5%
Greencoat UK Wind PLC Renewable Electricity 5.2% 3.4% 5.6% -32.2% -25.9%
SSE PLC Electric Utilities 4.5% 23.0% 39.0% -18.5% -4.3%
Drax Group PLC Power Producers & Energy -18.3% -28.0% -22.2% -50.6% -59.1%
Centrica PLC Multi-Utilities -21.9% -34.4% -22.2% -56.4% -68.0%
Avg. Relative Performance (%) +15% +21% +35% Â Â

Source: Thomson Reuters.

Hygiene, Personal Care and Home Care stocks vs FTSE All-Share

British hygiene, personal care and home care companies are currently in a unique position to cater to heightened demand for hygiene, personal care and home care products amid the rapid spread Coronavirus spread. Several globally recognised UK brands including Dettol, Harpic, Lysol, Mortein, Air-Wick, Lifebuoy, Domestos are in high demand across the globe, as people are rushing to shop hygiene products across the world.

Globally, the total confirmed cases of COVID-19 have surpassed 200,000 and death toll have also crossed the 8,000 mark. Demand for masks, sanitisers and hand wash are surpassing supply and have led the companies to rush and ramp up production of these products. The unprecedented spike in demand for these products are undoubtedly going to benefit global hygiene, personal care and home care businesses in FY20, implying higher revenue and earnings growth, and ultimately benefit their share price as well.

UK hygiene, personal care and healthcare stocks have significantly outperformed the broader index over the past 4-weeks, 13-weeks and 26-weeks. Industry major Reckitt Benckiser Group PLC share’s relative performance over the past 4-weeks against the benchmark FTSE 100 index stood at +38%, which is a huge surge as compared to normal days. On average terms, household and personal care product sector stocks have relatively outperformed their benchmark index by 34% in the past 4-weeks and by 36% in the past 13-weeks, respectively.

Also, a lower oil price regime is going to help these companies to bring down their cost of production, as a majority of their inputs are oil derivatives and a lower oil price would increase these companies’ margins and profitability not only in the near term but in long-term as well. Further, a demand spurt for their offerings will help them to achieve economies of scale.  The economy of scale and a lower oil price regime carries a high potential to prop up earnings and profitability for these companies and consequently, their share prices.

Relative Performance (%)

Company Name GICS Sub-Industry Name Benchmark Relative 4-week Price PCT Change Benchmark Relative 13-week Price PCT Change Benchmark Relative 26-week Price PCT Change YTD Price PCT Change 1-year Price PCT Change
Reckitt Benckiser Group PLC Household Products 37.8% 49.9% 37.8% -2.9% -5.3%
McBride PLC Household Products 36.7% 12.9% 79.0% -32.2% -38.4%
Unilever PLC Personal Products 33.4% 45.2% 21.2% -5.7% -3.8%
PZ Cussons PLC Household Products 26.5% 35.8% 11.9% -21.8% -21.0%
Avg. Rel. Performance 33.6% 35.9% 37.5% -15.7% -17.1%

(Source: Thomson Reuters)

It can clearly be inferred from the table, that the stocks of UK’s household products and personal products manufacturers have significantly outperformed their benchmark index amid a free fall on the LSE.

 

With Bank of England reducing the interest rates to a historic low level, the spotlight is back on diverse investment opportunities. 

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