The S&P/ASX 200 Index (ASX: XJO) and the Australian share market have had a very rough few weeks, as most investors would be painfully aware. Over the past month or so, the ASX 200 has lost a nasty 5.4% of its value. That's erased almost all of what were the pleasing gains of 2023 so far.
Many ASX 200 shares have done even worse. BHP Group Ltd (ASX: BHP) is down close to 10% over the past month. While ANZ Group Holdings Ltd (ASX: ANZ) shares have lost almost 8%.
With interest rates continuing to rise, not to mention northern hemisphere banks collapsing, it certainly has been a tenuous time for investors of late.
Considering all of this uncertainty in the air, we might have some investors that are keen to find some defensive ASX 200 shares.
Defensive shares can be defined as those whose earnings are non-cyclical, and more resistant than most to crises, inflation, recessions, or economic or financial shocks.
They are typically found in the healthcare, consumer staples, or gold sectors. So hospital titan Ramsay Health Care Limited (ASX: RHC), supermarket kingpin Woolworths Group Ltd (ASX: WOW), or gold mining giant Newcrest Mining Ltd (ASX: NCM) could all be described as defensive shares.
These are the kinds of companies that tend to weather recessions and other economic shocks. We all need to visit the hospital and buy food and household essentials, regardless of the economic weather. And gold, as the classic safe haven asset, tends to benefit from poor economic conditions. As we've dramatically seen over the past week or two.
Image source: Getty Images
But how do you find defensive ASX 200 shares with decent upside?
Well, one of the first things to note is that buying defensive shares when they are hot and in demand probably isn't the best way to grab yourself a winner. The old adage of 'fixing the roof when the sun is shining' is appropriate here.
For example, Newcrest Mining shares have rocketed more than 6% today, and by more than 9% over the past month. This reflects the surge in gold prices that we've recently seen:
Buying any ASX 200 share that is in vogue for a temporary reason can be a poor decision, akin to 'following the crowd'. In this case, buying a gold miner when gold was trading at historic lows might be a more prudent long-term investment.
But that doesn't mean all defensive shares are best avoided during times of turmoil. Stock market crashes, and other confidence crises, can often result in the proverbial baby getting thrown out with the bathwater. For example, Ramsay Heath Care shares fell more than 36% back in the COVID crash of 2020.
That was despite its hospitals remaining open and in high demand (for obvious reasons). Investors were quick to realise their mistake, and Ramsay shares swiftly recovered. The company gained 37% between 20 March and 29 May 2020:
We saw something similar, albeit less dramatic, with Woolworths over that same period.
Finding defensive shares at a share price that can give you upside requires both an understanding of how that business operates, and what price will get you good value. Often the best time to buy them is when no one else wants to.
So don't make the mistake of following the crowd into a defensive share. A company's underlying business might be defensive. But that doesn't make its share price immune from falling.
