Stocks with supposed ‘defensive’ qualities (e.g. Utilities, Telecoms, Health, Tobacco, Consumer staples) should be less sensitive – if at all – to the economic cycle, acting as portfolio buoyancy aids to limit damage when risk appetite sours and your more sensitive, higher beta stocks (e.g. Miners, Financials, Property, Oil) turn south. But that doesn’t mean they are totally immune to declines. Au contraire!

The UK 100 looks set to close around 0.5% higher this week, and its little brother, the , up by a whole one percent. However, this masks some huge drops (10-15%) in shares/sectors that might surprise you. In fact the UK flagship index offered an handful of prime examples where defensive stocks failed to live up to their names and reputation, highlighting the benefits of diversifying.

British Gas owner Centrica shares are down a whopping 15.8% this week after a profits warning on Tuesday attributed to warm weather, one-off US charges, competitive markets and UK client switching. All this countered the benefits of long-term restructuring. Worse still, the warning fuelled doubts about the sustainability of its very attractive 8-9% dividend yield, accelerating a 4yr downtrend for the shares on pre-existing woes about price caps, regulation and fierce competition (the same woes that have taken peers from their share price highs). Even speculation about Centrica now being a potential bid target did little to help the shares which remain pinned to 135p lows last seen in April 2003.

I mentioned the importance of diversification earlier. The fact that Centrica’s utility sector peers looks set to finish the week up or down by around 1% suggests the reasons for Centrica’s profits warning are more company specific than endemic. Hence the benefit of having several defensive stocks in your portfolio rather than pinning all your hopes on one particular share/sector, widening that buoyancy aid to dilute any potential risk (there is always some). This last point is just as applicable to riskier assets. Having all your eggs in one basket can indeed prove extremely profitable, but it can also prove extremely painful. Why risk it?

Other majors movers this week include engineer and defence contractor Babcock International. It’s shares raced out of the blocks on Wednesday morning following first half results, only to close the day down over 6%, and now -11% for the week (5.5yr lows, 675p). The fuel for this was concerns about increased political uncertainty on UK defense budgets, the Brexit outlook, problems at other support services companies and the fact that the stock now sits firmly in the relegation zone for the next UK Index reshuffle.

The same is true of healthcare provider Mediclinic international relegation-wise, down 8% this week to all-time lows of 512p after a near 6% fall on Tuesday when it abandoned its takeover of peer Spire Healthcare. The latter’s own shares sit offside by almost 12% for the week, only just above October’s pre-merger discussion lows. Lastly, telecoms provider TalkTalk extended a 15% decline last week on disappointing results by another 11% this week, sitting just above early December 2016 lows of 146p.

These share price moves highlight the cost of concentrating risk and failing to adequately diversity – paramount to all portfolio construction. We all know that shares can fall as well as rise and don’t move in a straight line. It’s all about making the journey as stress and risk free as possible. That said, with the aforementioned stocks now -41%, -29%, -34%, -30% and -11% for 2017, respectively, the first four are among the most battered UK blue-chips of 2017.

Might this week’s moves offer even better entry points for these as potential recovery candidates for 2018. You never know, they might end up being next year’s easyJet (-42% in 2016, +37% in 2017), Int. Cons. Airlines (-28%, +35%), Barratt Developments (-26%, +31%), Royal Bank of Scotland (-26%, +21%), Taylor Wimpey (-24%, +27%) or Berkeley Group (-24%, +31%).

In fact, we already have a fresh report out on this subject, so drop us a line, see which other stocks might be worth a look, and give our research service a trial run. Many happy clients have done so, still working with us years later. Join them and sample what may prove a very profitable difference.

Enjoy your weekend. Enjoy the Ashes.

Mike van Dulken, Head of Research, 24 Nov 2017