Income, defensive and value shares in the current bear market

The current bear market has wiped hundreds of billions off the value of UK listed in shares in the last month. Who would have thought a virus could cause such economic devastation?

It’s in tougher times like these that it’s worth as an investor stepping back and thinking about the mix of investments that you have. It’s all very well having investments with high growth potential and massive PE’s in the good times, but they are likely to be hit hardest when the economy takes a turn for the worse.

Unsurprisingly it’s clear that over the last month most of the shares which have performed best (ie. not lost as much value) are defensive and value shares, often with above-average yields. For example, two supermarkets, WM Morrison and J Sainsbury are amongst the two better performing FTSE 100 shares. And would broadly fit the mould described.

They sit alongside utilities such as Severn Trent and National Grid as well as pharmaceuticals such as AstraZeneca and GlaxoSmithKline. All industries and companies you’d expect to hold more value in a downturn because they’re defensive. People keep buying food, buying medicines, using electricity and water and so on.

Compare the losses these companies have seen in the last month – all less than 10% at the time of writing – to companies that had been high flying during the first month or two of 2020 and before. Companies such as JD Sports and 3i Group. Theses shares have declined by about 60 and 45% respectively. I believe the market is punishing those companies where valuations had became stretched.

For now, I think it would be advisable until conditions improve to avoid industries that are highly cyclical (miners, housebuilders and so forth) or require high consumer discretionary spending, for example, luxury retail. It’s likely with industry requiring huge government financial aid that things could get worse before they get better.

My main message is to think about always having some defensive shares as part of your portfolio. Slow, steady, unglamorous businesses have a part to play in both protecting and growing an investor’s wealth, especially in more difficult times.

Please note I own shares in National Grid and AstraZeneca.

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