With the Greek debt talks still ongoing, the present time is a highly uncertain one for investors across Europe and, in fact, the globe. And, looking ahead, it seems more likely than not that a long term deal between Greece and the rest of the Eurozone will fail to be agreed, with it being more probable that a short term fix will be found so as to allow the two sides some time to thrash out a more permanent solution.
The FTSE 100
As such, the FTSE 100 is likely to remain highly volatile in the months ahead. Even if the Greek debt talks are concluded with what the market views as a positive outcome, there remain severe problems elsewhere in the world. These include ongoing challenges in Ukraine, the effect of a lower oil price, deflation across Europe and a Chinese economy that could be running out of steam. As such, it could pay to own a number of less volatile, more defensive stocks such as National Grid (LSE: NG) (NYSE: NGG.US), United Utilities (LSE: UU) (NASDAQOTH: UUGRY.US) and Severn Trent (LSE: SVT).
Low Betas
Perhaps the best evidence of their lower volatility relative to the FTSE 100 can be seen in their betas. For example, National Grid and United Utilities have betas of just 0.7, while Severn Trent’s beta is only marginally higher at 0.8. This means that their share prices should, in theory, change by just 0.7% or 0.8% for every 1% move in the FTSE 100’s price level. So, for example, if the FTSE 100 were to fall by 10% following a Greek debt default or an escalation of tensions in Ukraine, National Grid, United Utilities and Severn Trent should outperform it.
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Defensive Business Models
Furthermore, National Grid, United Utilities and Severn Trent have very defensive business models that are not reliant upon the wider economic picture. And, with them having good long term earnings visibility as a result of regulatory controls that last for a number of years, they offer a degree of certainty that it is rare to find among equities at the present time. For income investors and those thinking about retirement (or even those in retirement), this relative certainty can prove to be very appealing.
Looking Ahead
Clearly, rising interest rates will make highly indebted companies such as National Grid, United Utilities and Severn Trent less appealing, since their interest costs will increase. However, interest rate rises are unlikely to be fast-paced, and could even fall before they increase if deflation becomes more than a temporary phenomenon.
As such, now could be the perfect time to buy utilities such as National Grid, United Utilities and Severn Trent – especially since they all yield over 4% at their current prices.
