The current bull market is longest in the history, and many market analysts forecasted that it could continue for some more time, but certainly one significant correction is ahead in the next six to eighteen months. As an inverted yield curve draw market attention towards a potential sign of recession. However, no one could say with certainty that when it is going to hit.
According to historical data available, on an average, a bull market has extended for just four and half years, but the current bull market started in March 2009 when the US broader indices bottomed after experiencing a financial crisis. However, there were ups and downs in between, but despite that, the ongoing bull rally is the longest in history.
On the other hand, growing trade rifts between the US and China has also jolted the investors’ sentiment globally. Recently, Chinese economic growth hit a 27-year low amid ongoing trade war, as per official data revealed on July 15, 2019. Since the modern quarterly record-keeping started in the year 1992, China’s economy recorded the slowest pace of growth in the April-June period of 2019, which would be considered something dangerous for most of the world.
One spokesperson from China’s National Bureau of Statistics said that “the present economic condition is challenging both at home and abroad as well, the global growth is softening, the market uncertainties both external and internal are improving, and the economy is under a new downtrend.”
The Fog of Brexit still hovering over the UK economy
Apart from global macro challenges, the UK is struggling at home. The ongoing political uncertainties in the UK and increased chances of a no-deal Brexit is spreading fear among the market participant and has increased chances of UK to drag into a recession post a disorderly Brexit. Many economists and market analysts predicted that the UK could drag into the recession in the wake of a no-deal Brexit or hard Brexit. Also, the recent data revealed by IHS Markit on manufacturing PMI reported a contraction in the manufacturing activities, which ultimately leads to a weaker consumer demand that could force the corporation to exercise a layoff. Also, Service PMI softened against the previous month reading.
The bottom line is the UK is passing through a tough time, and many investors have a lacklustre view toward the stock market, and global fund managers have also softened buying at the London Stock Exchange.
However, the global bull rally has not secured sufficient ground in the UK market as equities performance listed on the LSE against the equities listed in other developed market is different. Say for, the broader index of the United States the S&P 500 index has delivered a compounded average growth rate (CAGR) of 11.7%, on the other hand, the broader index of the United Kingdom the FTSE 100 has delivered a price CAGR return of 4.34% respectively, which clearly indicates no synchronization between global bull rally and the UK.
Amid ongoing uncertainties and increased chances for a hard Brexit, we have identified some of the defensive stocks, with decent Dividend yield and strong Free Cash Flow Yield, which are carrying the decent potential to protect investors portfolio during the tough time or a recession-like situation.
#1. Glencore Plc (LSE: GLEN)
Glencore Plc (GLEN) is among the world’s leading diversified natural resource companies, engaged in the business of production and distribution of minerals and metals, crude oil and oil products, coal and agricultural products. The company currently operates in more than 50 countries and has an employee base of 158,000, including contractors. The company is currently managing over 150 mines across the globe.
At the current trading level (as on July 18, 2019, before the market close), the group is offering a dividend yield of 5.6%, which is considerably above the dividend yield of FTSE 100 index of 4.39%, approximately 120bps above the dividend yield of FTSE 100 index. Also, at the current trading level, free cash flow yield of the group stood at 14.99%, which reflects a strong balance sheet of the Glencore. Its free cash flow yield of 14.99% is approximately 20.2x of the United Kingdom 10-Year Bond Yield, and its dividend yield of 5.6% is about 7.56x of the United Kingdom 10-Year Bond Yield.
#2. National Grid (LSE: NG)
National Grid Plc (NG) is United Kingdom-based global electricity and gas company engaged in the transmission and distribution of electricity and gas. The company offers installation and maintenance services to suppliers and metering. It offers services such as generation, transmission, and distribution of electricity, network services, interconnectors operation. The company’s other activities include metering and property services, financing, LNG storage and corporate activities. The company operates in the UK, US and North Eastern countries.
Generally, utility companies attract many investors during a rough season or challenging economic condition for their ability to maintain profitability during that phase of challenging economic cycle. While consumers may skip shopping at High street malls or other discretionary items during a recession, but they will continue paying their electricity bills even during a recession also.
Also, National Grid’s revenue sources are diversified across many geographies. At the current trading level (as on July 18, 2019, before the market close), the group is offering a dividend yield of 5.6% and its shares have rallied approximately 8.6% on a year-to-date basis. The current dividend yield of the group is approximately 1.27x of the FTSE 100 dividend yield and approximately 7.5x of the United Kingdom 10-Year Bond Yield.
#3. British American Tobacco PLC (LSE: BATS)
British American Tobacco PLC (BATS) is a London, United Kingdom-headquartered multinational tobacco and next-generation products company. It is one of the world’s biggest consumer goods companies and merchandises its products in more than 200 countries worldwide, covering six continents, and was the market leader in more than 55 countries in 2017. The four geographical segments are the reportable segments for the company, divided as United States, Europe and North Africa (ENA), Asia-Pacific and Middle East (APME) and Americas and Sub-Saharan Africa (AMSSA).
At the current trading level (as on July 18, 2019, before the market close), British American Tobacco PLC is offering a dividend yield of 6.87%, which is approximately 1.5x of the FTSE 100 dividend yield and approximately 9.28x of the United Kingdom 10-Year Bond Yield. The free cash flow yield (FCFY) of the group was at 14.53%, which reflects a strong balance sheet of the group and carrying the ability to distribute during the tough time as well. Also, the FCFY is substantially above the United Kingdom’s 10-Year Bond Yield.
#4. Micro Focus International PLC (LSE: MCRO)
Micro Focus International PLC (MCRO) is a British company engaged in the business of delivering and supporting software solutions, and its business involves acquiring companies whose margins it believes it can improve. The company operates five portfolios with approximately 500 product lines and help around 40,000 customers, ranging from small and medium-sized enterprises to most of the companies listed in the Forbes Global 2000. The group is a leading infrastructure software company with a global scale and is one of the largest technology company listed on the London Stock Exchange.
The group is offering a dividend yield of 6.0% (as on July 18, 2019, before the market close), which is approximately 1.36x of the FTSE 100 dividend yield and approximately 8.1x of the United Kingdom 10-Year Bond Yield. The Free cash flow yield (FCFY) of the group stood at 13.5, which also reflects a strong ability of the company to distribute dividends to its shareholders.
#5. Aviva Plc (LSE: AV)
Aviva PLC (AV) is a British insurance group, headquartered in London, United Kingdom, which provides a wide array of insurance and savings products along with asset management business. The group consists of four operating segments: General insurance and health, Long-term business, Fund management and Other. The group also differentiates its operations based on geography, and the segments are United Kingdom, Canada, France, Poland, Italy, Ireland, Spain and Other, Asia, Aviva Investors and Other Group activities. The company has decent fundamentals with a robust and resilient balance sheet, which is supported by the lower interest expense and a reduction in the weighted average shares in issue. The company’s businesses, in their respective markets, are well-positioned, and the overall performance has been steady with expectations to improve profitability in Canada.
Aviva Plc is offering a dividend yield of 7.6% (as on July 18, 2019, before the market close), which is approximately 1.7x of the FTSE 100 dividend yield and approximately 10.7x of the United Kingdom 10-Year Bond Yield. Also, the FCFY of the group stood at 36.58%, which is substantially high and offering the highest free cash flow yield among the FTSE 100 companies. This measure reflects its strong ability to sustain its dividend pay-outs.