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Is it time for investors to just pack up and go home? Not a single sector has made money since the bear market that began on 15 June last year. Indeed, only 13 companies in the entire FTSE 350 are registering positive share price movements over the period. Even for those who have targeted safe havens (On the defensive, 8 August 2007/Don’t drop your defence, 29 January/Stars that refused to shine, 24 September), while a number of defensive sectors have managed to outperform the overall market, the outcome has been disappointing. Even the FTSE 350's best performing sector, non-life insurers, is down a hefty 9 per cent.
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It wasn't nearly so universally bleak during the bear market that enveloped investors at the start of the millennium. Then defensive stocks got a chance to really shine. During the dot-com boom, the obsession with growth at the expense of companies with less exciting defensive earnings was turned on its head when the bubble burst. In the following three years, during which the overall market more than halved from peak to trough, the FTSE 350 tobacco sector climbed 89 per cent, the personal goods sector rose 64 per cent and the like of food producers managed to remain level. This time, the same three FTSE 350 sectors have respectively lost investors 13 per cent, 60 per cent and 30 per cent compared with the index's 45 per cent collapse so far.
The (relative) gainers
| Sector | Fall % | Notes |
|---|---|---|
| Non-life insurance | 19 | Falls limited by disaster-related claims, which are set to reverse falling premium rates. |
| Tobacco | 13 | Trading down to cheaper brands, though legislation still a threat |
| Pharma & biotech | 18 | Challenges priced in - and Warren Buffett has been buying |
| Electricity | 21 | M&A activity and defensive merits support performance |
The real turkeys
| Sector | Fall % | Notes |
|---|---|---|
| Industrial Metals | 95 | Commodity boom turned sour, emerging markets story discredited |
| Auto & Parts | 82 | Demand for cars has collapsed |
| Industrial Transport | 71 | Declining economic activity, collapse in Baltic Index, fears for profitability |
| Banks | 68 | Heavy write-offs, bail-outs, fears of collapse, rising bad debt |
So what's gone wrong with defensives?
One of the key problems with targeting defensive sectors during the recent bear market is that many have turned out to be more cyclical than they first appeared. Telecoms companies, both mobile and fixed line (down 31 per cent and 52 per cent respectively), have provided a good example of this with both BT's and Vodafone's businesses showing the strain of the economic downturn. Meanwhile, sub-sectors such as pub and gaming companies played off the virtue of their reputations for limited cyclicality during the bull market to raise lots of debt and are now suffering for such gung-ho business plans (Cyclical defensives, 14 October). And, as investor scrutiny intensifies, new anxieties are bubbling up in the erstwhile defensives sectors (Taste the difference, 22 October).
Even where cyclicality is still not an issue, other problems have reared their heads to spoil defensive sectors' time in the sun. Utility companies, for example, have seen the takeover premiums that they commanded in 2007 taken away, and water companies are facing their regular angst-inducing regulatory review. Meanwhile, investors in the pharmaceutical and biotechnology sector have had to come to terms with the industry's diminished growth prospects, caused by competition from generic drug makers and uninspiring product pipelines.
Don't give up
However, while the share price performance of companies in what are traditionally seen as defensive sectors has been disappointing in absolute terms, many such parts of the market are doing well relative to the broader index and should continue to show form.
The desultory mix of factors means that certain sectors are now showing signs of being both defensive and offering value. Beverages, for example, looks like it could continue its relatively good run with the sector's 4.2 per cent yield not too far off the 5 per cent 20-year high hit in 1996. And while both the pharmaceutical and mutli-utility sectors have performed well since we highlighted the value on offer (More Utilitarian, 22 April/The right medicine?, 13 February), their yields remain eye-catching with pharma in particular now matching the highs set earlier this year. And the mobile telecommunication sector also looks interesting, offering a 6.7 per cent yield while retaining many claims to being a defensive industry despite recent disappointments.
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