Two good reasons to stick with defensive stocks

The British Chambers of Commerce say the worst of the recession is behind us. But the stock market doesn't seem to agree. John Stepek asks what will happen next – and looks at why defensive stocks are the best medicine for investors.

The worst of the recession is over, the British Chambers of Commerce reckons. Meanwhile, yesterday, the FTSE 100 fell another 1%, falling to 4,194, its lowest level since mid-April.

This apparent lack of agreement between the official bodies and the market is by no means unusual. Back in March, everyone was still very glum. That was when the stock market decided to take off.

But now that everyone is starting to become a little more upbeat, the stock market is taking a decided turn for the worse. So what happens next?

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The recovery - if there is one - will be weak

The British Chambers of Commerce (BCC) think that the worst of the recession is over. Business confidence picked up sharply during the second quarter, while conditions improved across industry.

You might wonder why the stock market doesn't seem to agree, slipping back once again yesterday.

However, look a little beyond the headlines, and the BCC's story isn't all that cheerful in fact, it's pretty grim. Despite the pick up, most major measures of activity in the group's survey remain negative, with cash flow a particularly difficult problem for manufacturers right now. The group also reckons the recovery assuming there is one won't be much to shout about. BCC chief economist David Kerr said: "Even if we do get a recovery, it will be very shallow and very gradual more L-shaped than W-shaped."

Of course, the BCC is talking its book somewhat. The old default template for these press releases is still in place talk down any good news, highlight the bad, and demand interest rate cuts as loudly and regularly as possible, regardless of what else is happening in the wider economy.

The only thing that's changed now is that instead of demanding rate cuts, the BCC wants to see more "quantitative easing" (or money printing). It would like the Bank to hike its money-pumping plans from the current £125bn to £200bn.

We're not convinced that pumping more money into such an unstable economy is a great idea. However, we can agree with the BCC's fears of a weak recovery. And that's also what seems to be spooking stock market investors.

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Stick with defensive stocks

Miners and oil plays were among the big fallers yesterday as metal prices slipped and oil prices continue to ease back to around $65 a barrel. Deutsche Bank warned that miners were already priced for the recent recovery in metal prices. "We believe commodity prices will need to keep going up for significant rises from here." The trouble is, we suspect the next move in the short-term at least - will be down. With demand in the global economy still weak, it seems difficult to justify current commodity price levels, let alone even higher ones. And that means things don't look great for the miners.

On the other hand, defensive stocks were higher as investors looked for safe havens, with tobacco stocks and consumer good companies among the top gainers. We picked out some of our favourite defensive plays in a recent issue of MoneyWeek: Seven safe stocks that will last longer than the rally. If you're not already a subscriber then subscribe to MoneyWeek magazine.

The UK housing market won't recover any time soon

One market that doesn't look like recovering any time soon is the UK housing market. Despite the best efforts of the government and the Bank of England, lending is still very weak. The number of home loan products available is at a record low, according to The group reckons there are 2,282 deals on the market, with just 1,195 available to first-time buyers. At the peak in August 2007, there were more than 30,000 deals available.

The good news is that lending conditions are becoming a little less stringent, Richard Morea of mortgage broker London & Country tells The Telegraph. Lenders are more willing to lend at decent rates to those with a 25% deposit now, for example. However, that's still a pretty hefty sum to cough up for anyone trying to get by on the average salary.

We're holding our property Roundtable this month we're sure there'll be a vigorous debate on where house prices are headed you can read it in a couple of weeks. In the meantime, if you want a reminder of what everyone was saying around about this time last year, have a look here: When will Britain's housing market hit rock bottom?

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John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.