The 12th of May is a date for investors’ diaries. On the Tuesday following the General Election the country may not have a legitimate government, in the sense of one that represents the electorate, if David Cameron and Ed Miliband are vying to see which can form the more convincing working majority. The uncertainty could unsettle markets.
On that same day, Greece is due to make by far the largest tranche of its debt repayments to the IMF, a massive €750m. If it can’t or won’t pay, Greece’s departure from European Monetary Union could become inevitable. Markets could take a dive as domestic uncertainty is compounded by turmoil in the Eurozone. It could look very nasty.
Black Tuesday?
It would be easy if we knew in advance that 12th May was going to go down in stock market history as Black Tuesday. But that’s only one possibility out of many, and so not a good reason to leave the market completely — though if you’re planning to ‘sell in May and go away’, it might be worth doing so at the beginning of the month. Most likely, the UK will form a stable government in fairly short order. Few would be surprised if Greece’s politicians manage once again to wriggle through the gap between the rock of its populist policies and the hard place of economic realities.
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But to my mind the stars are aligned enough to warrant some cautious positioning ahead of mid-May. That means harvesting toppish holdings and carrying some cash, biasing my portfolio to defensive sectors and dollar-earners, and avoiding those easy tax-and-blame targets if a greenhorn administration presses the panic button. That’s underweight banks, then!
Standout defensive performers
The pharmaceutical and tobacco sectors were the standout defensive performers of the last financial crash. Between October 2007 and March 2009 they fell 15% and 17% respectively, against a near 50% drop in the FTSE 100. By early 2012 both sectors were well ahead of 2007 levels, whist the FTSE was still some 15% underwater.
My pick of big pharma is GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US). GSK’s scale gives it the R&D-spending power to be a winner in prescription drugs, whilst its vaccines and over-the-counter businesses provide stable earnings. The demographics of both the developed and developing worlds favour the sector and though the company stumbled in China, its early move into emerging markets should boost future revenues.
British American Tobacco (LSE: BATS) enhances its defensive characteristics with a diversified geographic exposure to compliment the addictive nature of its products. In broad terms revenues are split equally between Asia Pacific, Eastern Europe/Middle East, Western Europe and the Americas. That’s handy when one of the biggest risks to your business is legislation.
Another safe sector
Consumer staples also fared well in the financial crisis. Unilever (LSE: ULVR) (NYSE: UL.US) lost just a quarter of its value between 2007 and 2009, and by 2012 it was 30% up on 2007’s levels. Unilever’s broad global spread and global brand appeal bolster the robustness of its business, whist the company’s long-standing and entrenched position in many emerging markets — which account for 60% of revenues — offers prospects for further growth.
Most experts agree that it’s a mug’s game to try to time the market, but that shouldn’t stop you keeping a weather eye on developments and nudging the make-up of your portfolio accordingly.
