The start of August was the most volatile period for global stock markets since the pandemic struck. Yet the FTSE 100 has been relatively stable compared to other indexes.
This was highlighted by JP Morgan strategist Mislav Matejka recently. He said that if global stocks fall heavily in the coming weeks, the FTSE 100 could be “a good place to be in when activity is disappointing.”
In other words, a safe haven in tough times.
Getting defensive
The strategist said this is because the UK’s blue-chip index is known for being packed with large, stable companies from sectors like utilities, consumer goods, and healthcare.
These are areas where demand stays strong no matter how the economy is behaving. After all, people always need electricity, soap and medicine, which gives these stocks defensive qualities during stormy financial times.
This means these stocks tend to be less volatile (have a lower beta) than the broader market. Additionally, many of these firms pay out handsome dividends, potentially providing investors with a stable income.
Tesco has all the right ingredients
A defensive FTSE 100 stock that fits the bill here is Tesco (LSE: TSCO). The UK’s number one supermarket provides groceries and household goods that people need regardless of economic conditions.
Tesco stock also has a low beta ratio. A beta of 1 would mean it moves in line with the index, while a lower beta suggests less volatility and vice versa.
According to Yahoo Finance, Tesco’s five-year beta is 0.52. So, if the market drops by 10%, the stock generally tends to decrease by only 5% or so.
Basically, this indicates that Tesco stock is generally far less volatile than most. It’s much more likely to react to company-specific news than, say, a huge tech sell-off across the pond.
What’s been going on at Tesco?
In Q1, which covered the 13 weeks to 25 May, group sales rose 3.4% year on year to £15.3bn. This was driven by the easing of inflation and strong volume growth in the UK, Ireland and Central Europe.
The firm managed to strengthen its competitive position, growing its UK market share by 52 basis points to 27.6%. This doesn’t surprise me. I’m a loyal shopper due to the all-powerful Clubcard, which gives the grocer valuable data regarding my tastes.
The dividend yield currently stands at 3.8%, potentially rising to 4.2% by FY26 if brokers have it right. That might not seem a lot while interest rates are high, but it could be a decent starting yield with rates widely expected to head lower from here. Of course, dividends aren’t guaranteed though.
Online competition from the likes of Amazon, HelloFresh and Ocado is a potential risk to Tesco’s dominant market position over time. That said, online sales rose 8.9% during Q1, boosted by a strong contribution from Whoosh (its same-day home delivery service). So the company is performing strongly.
If I were looking for a defensive stock to buy during a market meltdown, I’d certainly consider Tesco.