Why you should stick with defensives

Last week the market suffered its "first big wobble" since October, says Neil Hume in the FT. As the FTSE reeled, defensive stocks, such as pharmaceuticals and utilities (overlooked in the rally since last March), became hot property. Indeed, they may well come back into fashion this year.

The market's slide was a "reminder of the dangers that lie ahead" and of the need for solid stocks with good yields in uncertain times. Note too that the fundamentals in the utilities and pharmaceutical sectors are improving.

Dividends at United Utilities and Severn Trent (both yield more than 6%) should now be sustainable for the next five years, according to Bobby Chada of Morgan Stanley. And the bank's Andrew Baum believes that the trend towards outsourcing research in the pharmaceutical sector should gather pace. That, in turn, will bolster profitability.

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Consider the charms of unloved Japan

"Serious profits can be made" by betting against the crowd, says Thomas Becket of PSigma IM. Enter Japan: "unloved, unfashionable [and] undervalued". Yet the longer-term outlook is encouraging, with Japan spearheading fast-growing industries such as energy efficiency.

Its manufacturers are among the world's best, while Japan's proximity to China's "huge population of eager new consumers is a wonderful opportunity", says Bill Emmott in The Times. And on a price/book-value basis, as John Millar of the Martin Currie Pacific Investment Trust points out, Japan is on a 40% discount to global markets.

The big picture: bank profits surge again for now

In the long run, earnings grow about as fast as the economy. But they can shoot above or below the long-term trend before reverting back to that trend. The US financial sector soared away during the credit bubble, decoupling from "the rest of the economy and reality", says Deutsche Bank's Jim Reid.

He calculated last year that the sector had notched up $1.2trn in "excess profits" that would be destroyed through "mean reversion". Sure enough, profits crashed on massive write-downs. But government support has allowed them to shoot back above their trend line. Regulation makes more downward lurches likely.