Large caps to gain from US slowdown

“Like the proverbial canary dying in the coal mine, a handful of UK companies are becoming short of breath as the US economy slows,” says Chris Hughes in the FT. Wolseley, Tomkins and Aga are among those who have recently revealed that their US markets are looking wobbly. “It’s tempting to explain these away as isolated cases… however, wherever you look, the evidence of a US slowdown is mounting.” So where should investors put their money if they want to be safe?

The obvious candidates to avoid are companies reliant either on discretionary spending by America’s consumers or on the buoyancy of its housing market. Instead, seek out ‘defensives’ – high-quality companies with earnings that will remain fairly stable in a slowdown, such as food retailers, pharmaceuticals and utilities. Data from the past five US economic cycles suggest that such defensive UK stocks begin outperforming the wider market about three months before US interest rates peak.

This could mean the FTSE 100’s heavyweights return to fashion after seven years of underperformance, says Tom Stevenson in The Daily Telegraph. Evidence of slowing global growth and reduced earnings expectations mean the defensiveness of these less-cyclical stocks is starting to look more attractive, after a  period in which the market’s attention has been focused on the mid-caps. Most of the biggest companies look cheap; since 1999, the Footsie’s top ten have moved from a 50% valuation premium to a 16% discount. They also provide good value in terms of dividend yield.

by Graham Buck


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