The COVID-19 pandemic has brought insane volatility to global financial markets. Each day we are seeing wild percentage swings to the upside and downside. It’s at times like these that the prudent investor turns their attention to having exposure to more defensive shares.
Defensive shares are classified as companies that can deliver stable earnings and a consistent dividend, regardless of the overall price action of the stock market.
Here are 2 defensive shares on the ASX that investors should keep an eye on during the coronavirus crisis.
Xero Limited (ASX: XRO)
Xero is an online accounting business that has excellent defensive qualities. The company has low debt, a sustainable revenue stream and is exposed to excellent growth prospects. In 2019, Xero reported over 2 million subscribers were using its accounting software and managed to add 478,000 new subscribers.
Recently, equity analysts from broker Morgan Stanley described the Xero share price as offering a rare opportunity. Analysts cited the company’s critical online accounting software that offers a defensive revenue stream. This is because small businesses regard their accounts as a necessity and Xero also meets a broad range of regulatory requirements.
Xero also boasts a strong balance sheet with $111 million cash in the bank that could see the company navigate through the coronavirus crisis. In addition, Xero is poised for growth in overseas markets and expects to exceed 5% in average revenue per user growth.
Brambles Limited (ASX: BXB)
Brambles is another company that has positioned itself with various defensive qualities. The company is a logistics giant, owning more than 330 million pallets and crates through its iconic CHEP brand. What gives Brambles its defensive qualities is its exposure to fast-moving consumer goods (FMCG) and stable supply chain.
In light of the coronavirus crisis, Brambles is poised to benefit from a number of tailwinds. Firstly, the panic buying and stockpiling of consumer staples has put the pressure on supermarkets to maintain a reliable supply chain. With the food sector being an essential service, Brambles will see high demand for reusable plastic crates and pallets.
Secondly, a weaker Australian dollar and lower oil prices will help the company reduce costs of production. In addition, with only 1.2% of 1H20 sales coming from Asia, Brambles is not likely to feel adverse impacts from a temporary slowdown in China.
Should you buy?
In my opinion, the volatility we are seeing in global financial markets could make investors rush into buying stocks in fear of missing the bottom of the market.
I think a prudent strategy for long-term investors is to hedge their portfolio with defensive shares like Xero and Brambles. These shares are exposed to sectors that are necessities and also have exposure to tailwinds of growth.
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Motley Fool contributor Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Xero. 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.