5 defensive ASX shares to guide you through the market correction

The market is getting hammered, but one fund reckons these 5 stocks could take you to the light at the end of the tunnel.

| More on:

Image source: Getty Images

As Australia battles the Delta strain of the coronavirus, the S&P/ASX 200 Index (ASX: XJO) has nosedived 3.8% over the last month.

It’s even more depressing to think it’s lost 5% since its mid-August peak.

So more investors are now starting to wonder about defensive ASX shares.

Pengana Australian Equities Fund is certainly thinking that way, according to a webinar seen on Tuesday.

Analyst Mark Christensen said his team is unearthing resilient stocks by applying one of 3 tests:

  • Inflation protection through pricing power and long-term contracts
  • Avoiding ‘forecasting errors’ for post-lockdown and post-COVID performance
  • Resilience to supply chain and inventory disruptions

What does the Pengana team mean by “avoiding forecasting errors”?

“We protect ourselves here by making sure that we’re in defensively characterised businesses to start off with,” he said.

“That is businesses that are not going to have volatile earnings. Businesses that have been pretty solid through COVID and hopefully coming out of it as well. And whose underlying drivers are not so cyclical but have some fundamental growth underlay.”

The additional element the Pengana team favours is transparent business models, which provide certainty for ongoing earnings.

People need these products, it’s not a choice

Christensen cited respiratory device maker Resmed CDI (ASX: RMD) as a classic defensive example.

“People who use those products do so because they need them. It’s not discretion.”

Resmed shares are down a whopping 11.3% over the past month, but have climbed 27.4% this year despite that.

Supermarket giant Woolworths Group Ltd (ASX: WOW) is another business with a transparent revenue model and stable earnings.

“Woolworths is obviously a very defensive stock,” said Christensen.

Shares for Woolies are up nearly 16% for the year so far, but have shaved 3.6% from the price over the past month.

The other ASX shares Christensen likes for their resilience are healthcare player CSL Limited (ASX: CSL), private hospital network Ramsay Health Care Limited (ASX: RHC), and property developer Mirvac Group (ASX: MGR).

CSL and Ramsay have been hammered 6.5% and 4.3% downwards respectively in the past month. Mirvac shares have lost 6.2%.

“More than half of our portfolio is in what we call defensive names, and that helps a lot when we’re making an assessment about what future earnings look like.”

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of August 16th 2021

Motley Fool contributor Tony Yoo owns shares of CSL Ltd. and ResMed Inc. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended CSL Ltd. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended ResMed. The Motley Fool Australia has recommended Ramsay Health Care Limited and ResMed Inc. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Broker Notes