An increasingly uncertain economic outlook may naturally prompt investors to seek stocks that offer defensive characteristics. After all, global economic growth forecasts have been downgraded over recent months as high inflation has prompted hawkish central bank action. This is unlikely to be conducive to favourable operating conditions for most sectors.
Utility stocks such as Severn Trent (LON: SVT) and precious metals miners including Fresnillo (LON: FRES) could be viewed as relatively appealing by some investors in the current economic environment. With their share prices having come under pressure of late, could they now generate FTSE 100-beating performances during a turbulent time for equity markets?
Severn Trent
Water and wastewater services provider Severn Trent is arguably among the most defensive stocks in the FTSE 100. After all, demand for water is unlikely to materially change depending on the economy’s performance.
Of course, the ability of its consumers and businesses to pay in response to the cost-of-living crisis could affect its financial prospects. But with bad debts falling in its most recent financial year and representing just 2.1% of revenue, it is well placed to overcome a challenging economic outlook.
Severn Trent also offers a degree of inflation protection, since the cost of water is linked to price rises in the wider economy. This, though, is offset to some degree by its index-linked debt that has become more costly in an era of high inflation. But with just 27% of its total debt linked to inflation, it is in a sound financial position to cope with rampant price rises.
Furthermore, it aims to increase dividend payouts at the same pace as inflation (CPIH). This provides its investors with additional protection at the present time and, when viewed alongside a 4.2% yield, means it offers significant income investing potential.
Certainly, Severn Trent’s share price is unlikely to produce stunning capital growth over the long run due to the nature of the industry in which it operates. But from a defensive and income standpoint, it offers investment appeal given current economic conditions.
Fresnillo
Precious metals miner Fresnillo has experienced a turbulent few years, with labour challenges, Covid-19 and delays to its pipeline of new projects holding back its financial performance. Indeed, its adjusted revenue declined by 13% in the first half of the year due mainly to lower gold volumes.
However, the firm could offer a degree of defensive appeal given current economic conditions. Precious metals have previously appealed as a store of wealth during periods of high inflation and economic turbulence. While this may partially be offset by rising interest rates that make interest-producing assets relatively attractive, gold in particular could offer greater stability than other commodities in a period of slowing global growth.
Fresnillo’s share price has fallen by a rather modest 2% over the past six months. It now trades on a forward price-to-earnings ratio of around 14, which suggests it offers fair value for money. With the firm on track to meet production guidance for the full year, progress being made in new assets coming onstream and it having extremely low net debt, it could offer FTSE 100-beating returns during a tough period for the global economy.