Pick up defensive stocks while they're cheap

published 19 June 2009

Intoxicated by the prospect of an economic recovery, markets everywhere not just in Britain have been selling off or neglecting defensive stocks, giving investors an opportunity to pick them up on the cheap. Bloomberg.com points out that banks and industrial companies have spearheaded the rally in the MSCI World index since March, while the MSCI World Utilities index is down by almost 9% this year. On a p/e of around 13, it's now trading at its biggest discount to the World index in five years and it yields 5.1%, the most since 1995.

Citigroup notes that since the end of last year, pan-European defensive stocks have slumped from a 70% premium to cyclicals to a 20% discount. They now look "cheap in absolute and relative terms". The prospective yield on European telecoms groups is 80% higher than the rest of the market, while UK pharma is at its lowest historic p/e (under ten) since the 1970s.

A basket of Citigroup's biggest buy-rated European defensives with strong balance sheets (Nestl, Vodafone, Glaxo, Telefonica, Unilever, Sanofi-Aventis, Eon, BAT, GDF Suez and Enel) is on a forward p/e of under ten for the first time since 1990. "Time for a sniff?"

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Evolution Securities is especially keen on tobacco stocks, says Nick Hassell in The Times. The likes of Imperial Tobacco (LSE:IMT)and BAT (LSE:BATS), which yield 6% and 5% respectively, should be able to keep profits and dividends going.

They should prove popular once defensives come back into fashion as is very likely when the stockmarket rally falters amid signs that a V-shaped recovery will prove elusive.