Investing amidst market volatility: How a defensive equities strategy can help protect long-term financial goals

A good offence wins you games; a good defence wins you tournaments.

Right now, investors in Singapore are looking to make a smart defensive play in the face of some hard-hitting obstacles, namely the terrible trio of inflation, potential further interest rate hikes across regions, and recession risk.

But what is defensive investing, and how can it help address some of the challenges investors face in an uncertain investing environment?

With any on-field game, having a solid defensive line doesn't guarantee victory - but it generally means that if you do lose, then it's not by as much or as often.

Good defenders provide the foundation for the rest of the team, allowing other players to move faster and further out while knowing their backs are covered. A good coach knows how to balance risk and reward without sacrificing hard-won ground.

It's much the same with defensive funds as part of a diversified investment portfolio. It pays to keep your goals in mind.

Defensive investing is a form of investment risk management strategy that aims to minimise the risk of incurring losses in portfolios as economic headwinds and the stock market become more volatile. Instead of focusing solely on maximising returns, defensive investing prioritises capital preservation by targeting companies or other assets, such as certain types of bonds, that are more resilient to market volatility and economic downturns.

Getting your defensive game on

Investors can deploy a defensive strategy to protect their long-term financial goals and potentially smooth out volatility and any losses they incur as market conditions change.

One common defensive approach is investing in companies that historically deliver stable earnings and dividend payments, like those operating in industries less sensitive to the economic cycle, such as healthcare and consumer staples. These companies are often called defensive stocks because they tend to hold up well during market downturns.

Another approach involves diversifying a portfolio across different asset classes, including stocks, bonds, and cash, to reduce overall risk. This helps protect against the possibility of any single investment suffering significant losses.

Covering all your bases

"The global economic outlook is highly uncertain. As we all know, markets hate ambiguity, so they are likely to be volatile. Markets potentially react excessively to dataflow as they try to assess the prospects for key variables," says Alexander Davey, Global Capability Head, Active and Quantitative Equity, at HSBC Asset Management.

Such variables include interest rates, which influence the cost of borrowing, and hence economic activity and the outlook for corporate profits. The latter determines the price investors are willing to pay for equities.

"Since nobody has 20/20 forward vision, we recognise that there may be challenges ahead. Inflation, for example, may prove more persistent than we expect. That means markets could remain volatile for some time yet," he says.

He adds, China's reopening is likely to boost growth particularly in Asia, where emerging economies are likely to avoid recession: "So, we have two parallel worlds, with recession a real risk in the advanced economies but less likely in emerging Asia.

"This opaque outlook is why we think investors would do well to retain a defensive posture until visibility on factors such as corporate profits growth improves significantly."

A defensive approach is certainly a tried-and-tested formula. Quite simply, stocks that aren't reliant on the economic cycle - Steady Eddies, as they are sometimes known - tend to outperform during periods of economic turbulence because investors know they will deliver reliable profits.

"Diversification is always wise, and that is true of defensive investing, so it's a good idea to have exposure to a broad range of defensive stocks in a variety of sectors and global markets.

"A defensive stance can also help you manage volatility. That's because a portfolio tilted towards reliable earners shouldn't react as aggressively as the market when the latter either rises or falls - thus providing protection from extreme moves," he explains.

The ball is in your court

Davey believes that amongst other options, Asia Ex Japan Equity and Global Equity Strategies may be ideal for Singapore-based investors who want to pivot towards a defensive position.

As part of the game plan, we could consider strategies that revolve around high dividend and volatility focused themes that invest in companies across Asia and around the world with such attributes.

He says, "These strategies aim to shield investors against sudden market storms - and here in Singapore we know all too well how torrential downpours can appear out of nowhere."

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