Two good reasons to stick with defensive stocks

published 7 July 2009

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.

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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."

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.

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 Moneysupermarket.com. 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.

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He 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.

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.