O.K. it appears we are now in a bear market. A “bear” market is when the S&P 500 is down more than 20% from its highs. As global markets are highly correlated most of them are off significantly as well. Rising interest rates and higher than expected inflation have made 2022 a tough year for equity market investors.
Bear markets are not new. There have been 17 bear markets in the U.S. since World War II. Bear markets have, on average, lasted about a year, producing an average peak-to-trough decline of just shy of 30%.
So, what should investors do? The first step, in our view, is play “defense”. That is, invest in only the most defensive companies. Companies that make things we need on a daily basis or provide a service we just can’t do without. Companies that can raise prices and are somewhat immune from economic or interest rate cycles.
Fortunately, global markets contain quite a number of these companies. HALO Technologies has compiled a list of what we consider to be the “10 best bear market investments”
All these companies are big, global in scope and pay attractive dividends. For example, Imperial Brands yields 7.7%, Verizon 5.1% and Pfizer 3.3%.
It’s important to realize, that in a market downturn, these stocks will likely go down along with everything else. The key is they will decline, for the most part, much less than the market and will be generating income for the holder. Also, an investor in these types of companies can sleep at night and know that they will still be around next year (and the year after that…) unlike some of the more speculative stocks in the market.
Now in case you hadn’t noticed we are in the middle of a war. It is the largest land battle in Europe since WW2 and is, in part, responsible for driving up the price of commodities and energy which is in turn producing the inflation that is plaguing markets. Plus, China still has hostile intentions towards Taiwan, is peddling influence in the Pacific region, and many fear that Russia may go beyond Ukraine. Add to that, the powder keg that is the Middle East and the Iranians’ nuclear ambitions. All of a sudden, the world is a lot less safe!
We have a strategy for this as well, but it is another type of “Defense” That is invest in the defense companies that make the planes, tanks, ships, missiles and assorted weaponry that we need to defend ourselves. ESG investors look away now.
These companies are timely. Their main customers are deep pocketed governments who not surprisingly are substantially increasing their defence budgets. Europe's key economies are likely to spend more on defense as Russia's invasion of Ukraine reinforces the proximity of real threats, so it is likely that after years of “underinvesting”, spending will more than double to about $500 billion or greater. Land forces will need the largest overhaul, though air force and navy programs will be upgraded as well. And let’s not forget the 800 lb. gorilla of defense spending-the U.S. Its 2022 defense budget of $778 billion is one of the largest ever and American military spending as a percent of GDP remains one of the highest in the world at 3.7%. It’s likely this will increase over time no matter which party is in the White House.
Inflation is not a problem for the companies that operate in this sector as most of them as their contacts have price escalation clauses to cover higher costs of raw materials etc. These companies are simply not impacted by economic conditions.
Here are 5 companies we like in the defence sector. (Three from the U.S. and two from Europe) All are main beneficiaries of the escalation in defence budgets globally. They are technology companies as much as manufacturing companies. Their weaponry is state of the art.
Lockheed Martin. (LMT) Makes the F-35, the world’s most advanced fighter plane plus helicopters, ship and submarine combat technology, missiles and missile defense systems.
Northrop Grumman. (NOC) Specializes in air and missile defense systems, advanced aircraft, advanced weapons and long-range fires capabilities, mission systems, networking and battlefield communication.
Raytheon Technologies. (RTX) Electronic warfare solutions, including high-energy laser weapons systems, command and control systems.
BAE Systems. (BA/LN) U.K. based manufactures military aircraft, surface ships, submarines, radar, avionics, communications, electronics, and guided weapon systems.
Thales. (HO FP) Paris based. Has prime contractor roles in prioritized national defense areas, including space, military electronics and communications.
Like our list of the ten best bear market companies, these companies are large, well-capitalized, pay reasonable dividends, and between them make the majority of the weaponry held by Western democracies.
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