‘The relative value of defensive companies compared with those that have cyclical earnings are at an historic extreme as investors have sought the comfort of predictability.’ – Kerr Neilson, Platinum Capital December 2008 quarterly report.
While the stock market herd is unusually subdued today, it still needs something to charge towards and at the moment it’s defensive stocks. Buy Telstra, Woolworths and AGL, the theory goes, and your portfolio will avoid the pain of recession.
This has some logic to it, because the profits of these businesses will tend to hold up during tough times. But just as high-growth businesses don’t always make high-growth investments, a defensive business doesn’t guarantee a defensive investment. Price is crucial. And that’s the part that tends to get overlooked by the finance lift-outs in the Sunday papers.
The bandwagon has departed
It’s too late to jump on the defensive business bandwagon now. Telstra and Woolworths have already outperformed, falling by 16% and 20% respectively since the All Ordinaries reached its peak on 11 November 2007, versus a fall of 48% for the index itself. And AGL is up an impressive 10% over the same period.
The time to buy resources stocks was 2003, before ‘stronger for longer’ was on the front page of the paper. And if you’re prone to panic, the time to switch into ‘defensive’ stocks, or cash, was 18 months ago – a time when our suggestion that a hangover would follow the global binge was generally considered blasphemous.
Find a safe harbour elsewhere
The vast majority of defensive businesses look expensive today. They’re expensive in their own right, but particularly so relative to the value on offer elsewhere. Those seeking security in recognised defensive business are missing better opportunities.
The stock market represents today’s expectations of what the future holds. Now that a recession is blatantly obvious to all and sundry, it’s time to start thinking about what the world will look like on the other side.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.