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Fund manager picks 3 defensive shares for volatile times

Investors may have gotten used to lower volatility in recent times thanks to low interest rates, quantitative easing, large capital inflows into passive investing and synchronised global growth.

Trade wars and rising interest rates could cause more volatility in times ahead. Marcus Bogdan of Blackmore Capital recently wrote for Livewire about what blue chip shares could be good to hold in rough times.

He emphasised that it’s the businesses with sound operating models that are underpinned by resilient balance sheets, particularly elevated cash levels, that will survive and prosper through harder economic times. These are his three picks:

Woodside Petroleum Limited (ASX: WPL)

Mr Bogdan said that Australia’s largest oil and gas company is well-positioned to benefit from strengthening demand for liquefied natural gas as it produces 7% of the global LNG supply and operates a fleet of floating production storage and offloading facilities.

Global LNG demand is predicted to grow by around 4% a year up to 2035. Mr Bogdan thinks the enterprise to earnings before interest, tax, depreciation and amortisation (EBITDA) multiple of around 8 times and price to book valuation of 1.3 times is attractive.

Wesfarmers Ltd (ASX: WES)

The Wesfarmers balance sheet is strong and attractive according to Mr Bogdan, along with the strong cash generation of its businesses like Bunnings which are fairly defensive.

Wesfarmers offers investors a more stable future after agreeing to end the UK Bunnings expansion as well as selling its Curragh coal mine for $700 million.

Caltex Australia Limited (ASX: CTX)

Mr Bogdan thinks Caltex may be able to unlock more value for shareholders with its infrastructure assets and its convenience stores which are located at its service stations.

Caltex is also on an enterprise value to EBITDA ratio of less than 8 and has a conservative balance sheet in regards to debt.

Foolish takeaway

I agree that these three businesses may fair better than some other blue chips on the ASX like JB Hi-Fi Limited (ASX: JBH) in a recession. However, I think there are ‘safer’ businesses out there like InvoCare Limited (ASX: IVC) and Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) that could be better long-term picks.

Another option to easily ride through a recession could be this top growth share that is expanding into Thailand and is predicting profit growth of 30% in FY18.

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Motley Fool contributor Tristan Harrison owns shares of InvoCare Limited and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of and has recommended Washington H. Soul Pattinson and Company Limited and Wesfarmers Limited. The Motley Fool Australia has recommended InvoCare Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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