‘Cockroach shares’ the pros are backing to survive market turmoil

The global geopolitical environment is as unpredictable as it has been in recent months, and indeed for the past decade and more, and markets worldwide have been hard hit. So, it’s all the more important, against such a volatile backdrop, for careful fund managers to provide some downside protection for their portfolios through holdings in sectors and stocks with exceptional resilience.

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Here, then, we round up a selection of what Simon Edelsten, chief investment officer at Goshawk Asset Management, describes as “cockroach stocks” for their potential capacity to survive even the most toxic of shocks.

United States

The US market has become very expensive and very concentrated; the economic outlook there is uncertain and becoming more so.  As James Harries, co-manager of STS Global Income & Growth Trust Ord (LSE:STS), observes: “The global tariff impositions from the White House provide an exogenous shock to a fragile situation, so the recent turmoil should not be a surprise.”

Nonetheless, he and other managers point to several US stocks that have served well in a defensive capacity and are likely to continue to do so.

Harries seeks high-quality global income assets that will sustainably grow free cash flow and dividends, even if the US experiences a recession and weak equity markets.

He flags up tobacco business Philip Morris International Inc (NYSE:PM)– a natural choice as a defensive stock where demand is particularly ‘sticky’. The company has been investing for years in less harmful alternatives to cigarettes; it performed very strongly last year, driven mainly by growth in demand for the premium heat-not-burn product IQOS, as well as a fast-growing smoke-free nicotine pouch called Zyn.

As a consequence, says Harries, Philip Morris is enjoying “robust and increasingly sustainable growth that is now being appreciated by the market. The company is likely to do especially well if the US dollar continues to be weak.”

Martin Connaghan and Samantha Fitzpatrick, co-managers of Murray International Ord (LSE:MYI), concur with Harries’ choice of Philip Morris. “Murray International has an income mandate, and Philip Morris and the other tobacco exposures taken in the portfolio are primarily held to help deliver here. That said, the recent strong performance has meant its yield has contracted in to 3.5% as of 4 April,” Connaghan adds.

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Another defensive favourite with Connaghan is derivatives exchange CME Group Inc Class A (NASDAQ:CME). “We like exchanges, as these businesses typically enjoy high barriers to entry, great margins and strong cash generation. They are highly counter-cyclical too, as transaction volumes correlate with market volatility, which makes them an attractive macro hedge from the portfolio construction perspective,” he explains.

On the Rathbone Multi-Asset Portfolio funds, manager Will McIntosh-Whyte picks out several infrastructure-focused names with “solid balance sheets and highly defensive balance sheets, and a relatively limited direct tariff impact too”.

These include American Tower Corp (NYSE:AMT), which leases tower and near-tower space for communications equipment. Additional revenues can come when leases need to be renegotiated to boost coverage or add new technology such as 5G; and growing demand for wireless infrastructure should provide a long-term tailwind for the business.

McIntosh-Whyte also highlights a market-leading multi-utility energy company, WEC Energy Group Inc (NYSE:WEC), which serves mainly Wisconsin and is considered to be one of the most reliable electricity providers in the US. “That’s critical in a region where temperatures of -20 degrees Celsius are not uncommon,” he points out.

Moreover, as well as the attractive inflation-proofed revenue growth typical of utility companies, WEC Energy “can also potentially benefit from local economic growth, with a steady stream of companies attracted to Wisconsin for new manufacturing plants”.

Europe

At Fidelity European fund and its sister investment trust, co-manager Marcel Stotzel believes that although tariffs have been “universally detrimental” to markets and economies, some sectors are likely to be relatively less hard-hit. However, he stresses, the quick-fire policy changes coming from the White House make it very difficult to be certain about anything at present.

One traditional safe haven in turbulent markets has historically been consumer staples, and they seem to be holding up pretty well this time too, says Stotzel.

He suggests beauty and personal care business L'Oreal SA (EURONEXT:OR). Not only does it boast robust fundamentals, an innovative digital mindset and strong long-term growth prospects, despite recent difficulties in China, but it “has also maintained a successful track record of creating value and sales growth through bolt-on acquisitions”.

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We’ve already heard about the natural attractions of financial exchanges in periods of high market volatility. Stotzel is a fan of Deutsche Boerse AG (XETRA:DB1), which he describes as a “high-quality and high-margin business with a diverse portfolio of interesting growth assets as well as a strong balance sheet”.

Deutsche Boerse is also the choice of Timothy Lewis, who manages JPMorgan European Growth & Income Ord (LSE:JEGI) investment trust. “The company is well-positioned to benefit from trends such as increased trading volumes and the growing demand for financial data and analytics. When volatility in markets is heightened, these trends grow even stronger,” he explains.

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Goshawk’s Edelsten picks Munchener Ruckversicherungs-Gesellschaft AG (XETRA:MUV2), “one of the three dominant global reinsurance companies”. Reinsurance protects companies from eventualities such as natural disasters; these have risen in recent years, pushing up the cost of that cover.

At the same time, governments have tended to reduce the amount of emergency financial aid they offer, and businesses such as Munich Reinsurance are stepping in to fill the shortfall. Moreover, as Edelsten points out, “the premiums received are now invested at higher yields than in the past, making the industry more profitable”.

Connaghan and Fitzpatrick suggest the French energy company TotalEnergies SE (EURONEXT:TTE). Energy isn’t typically thought of as a safe haven, because usually when the market falls it is because there are concerns around economic growth, which typically hits commodities hard – but as Connaghan explains, that hasn’t really been the case so far.

“Most of the absolute weakness has been felt in technology, consumer discretionary and to a lesser extent industrials,” he says, although he warns that the potential onset of stagflation and economic slowdown might have a greater impact.

They consider Total nonetheless to be well-diversified and well-managed, with sensible capital allocation plans and “consistent messaging around its approach to the energy transition” - plus the attraction of a decent yield.

UK

Chemring Group (LSE:CHG) is a robust defensive choice in every sense of the word, says David Smith, manager of Henderson High Income Ord (LSE:HHI). The British business operates in specialist areas of the defence arena, including explosives and missile parts and threat detection technology, and has a strong market position there.

“Although there is a potential for a ceasefire in Ukraine, rising geopolitical tensions mean governments across the world are likely to prioritise increased defence spending over the longer term, irrespective of economic conditions,” he comments. “The company’s valuation is attractive given this long-term growth potential, and should drive strong dividend growth.”

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A different tack is favoured by Anthony Lynch, portfolio manager for JPMorgan Claverhouse Ord (LSE:JCH) investment trust. He is “particularly confident” in pork and poultry processing business Cranswick (LSE:CWK), which supplies UK grocers and fast food operators.

With a strong track record of good returns on invested capital, plus several years of higher-than-usual investment, Lynch believes Cranswick is “well-positioned to deliver an acceleration in earnings growth” and should continue to perform well, even during periods of market volatility.

“Given the essential nature of its business in the food sector, Cranswick offers a reliable option for investors seeking stability in turbulent market conditions,” he adds.

Asia

On the whole, our experts have focused on regions other than Asia for their defensive picks, perhaps in light of the particular uncertainty around China – but Edelsten makes special mention of Singapore Telecommunications Ltd (SGX:Z74).Its associate companies provide mobile services in India, Indonesia and Thailand, where mobile networks often provide the internet access for small businesses.

“We keep paying our mobile phone bills whether we are feeling flush or not; indeed we keep paying them even if we lose our job,” he argues. “We have found this a business which is stable through most political and economic turmoil.”

Overall, although markets are highly volatile and there’s arguably little hope of prolonged stability while Trump is in power, good stock-picking managers are still able to identify businesses that provide good anchors for well-balanced portfolios.