A bear market is generally defined as a 20% fall from a stock market’s high. The FTSE 100 has fallen by 11% from its all-time high of 7,877 points which was achieved in May. Therefore, while it is not yet in bear market territory, it is more than halfway there.
Continued volatility could be ahead, with investors seemingly concerned about the prospect of further tariffs, a rising US interest rate, as well as the threat of a slowdown in emerging markets. Given those risks, defensive shares such as British American Tobacco (LON:BATS) and National Grid (LON:NG.) could become increasingly appealing.
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After nearly ten years of a bull market, it would be unsurprising for the FTSE 100 to experience a period of disappointment. Global stock markets currently face the prospect of further tariffs on imports from major economies such as the US and China. Already, the IMF has warned that the tariffs that have previously been announced could reduce global GDP in 2020 by as much as 50 basis points. And since Donald Trump remains a difficult President to second-guess, there seems to be little way of knowing if a full-scale trade war will take place.
At the same time, the US economy is booming. Growth in GDP of 4.2% was recorded in the second quarter of the year. Further growth is anticipated, and this could mean that additional interest rate rises are ahead. The risk to the US economy from a higher interest rate is clear: it could hold back spending and choke off the growth that has been delivered in recent years. A further effect of a rising US interest rate may be a slowdown in emerging market growth. A number of developing nations have become increasingly indebted due in part to low debt-servicing costs. Higher interest rates could curtail their growth prospects.
Although defensive shares have been out of fashion for many years, eventually they are likely to become increasingly popular. Given the recent performance of the FTSE 100, it would not be a major surprise for that time to be now. As a result, companies such as British American Tobacco and National Grid could offer increasing investment appeal.
British American Tobacco is experiencing a transitionary period, as its business pivots towards next generation products. They could offer high growth potential as consumers gradually switch towards less harmful alternatives to cigarettes. In the meantime, the pricing power which the company has in tobacco could lead to steady sales and profit growth. With a P/E ratio of 14 and EPS growth of 9% forecast for next year, the stock may offer good value for money.
National Grid’s outlook may be impacted by fears surrounding nationalisation. Given Brexit-related risks, a general election may not be too far away and this could increase the chances of a pro-nationalisation Labour government. The company’s near-6% dividend yield, though, may factor in this risk. Since it has a business model that has relatively low positive correlation with the wider economy, it could offer stronger performance than an uncertain FTSE 100 over the medium term.