Heightened stock market volatility over the past few weeks may have inspired investors to review their portfolios. Among other things, investors may be pondering whether they own enough ASX defensive stocks.
ASX defensive stocks are typically regarded as companies within the healthcare, consumer staples, and utilities sectors. Demand for products and services within these industries is relatively stable and does not fluctuate with economic conditions.
For example, healthcare provider Sonic Healthcare Ltd (ASX: SHL), which provides pathology and radiology services, is likely to continue receiving business regardless of the macroeconomic climate. Patients are likely to prioritise medical testing to attend to an illness, even when cash is tight.
Similarly, supermarket giants Coles Group Ltd (ASX: COL) and Woolworths Group Ltd (ASX: WOW), which mostly sell consumer staples (such as groceries and toiletries), are unlikely to see a significant fluctuation in demand through the cycle. While consumers may make an effort to reduce costs by switching to cheaper brands during a recession, the impact on overall revenue is likely to be negligible.
Finally, utility providers such as telecommunications company Telstra Group Ltd (ASX: TLS) are also considered defensive in nature. Similar to the impact of a recession on supermarkets, consumers may switch to a lower phone plan but are unlikely to opt out of mobile phone usage completely. This is 2025 after all!
Beyond these traditional sectors, there are some other interesting ASX defensive stocks to consider. Let's explore two options.
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ASX defensive stock: Propel Funeral Partners Ltd (ASX: PFP)
As the saying goes, there are two certainties in life: death and taxes.
Propel Funeral Partners operates a network of funeral homes across Australia and New Zealand, providing end-of-life services. The death care industry is largely non-cyclical, ensuring steady demand regardless of economic conditions. Due to the essential nature of the services, the industry has a high degree of pricing power. This means customers are unlikely to delay or cancel funeral services during a downturn or complain about the price. These qualities make it a great ASX defensive stock.
ASX defensive stock: Aristocrat Leisure Ltd (ASX: ALL)
Gaming content and mobile games publisher Aristocrat Leisure is another high-quality defensive company. Consumer participation in gaming has proven relatively consistent throughout various economic cycles, with consumers reluctant to cut this activity from their budgets. Accordingly, Aristocrat is also likely to outperform more economically sensitive stocks during a market downturn.
Don't forget the golden rule: Diversification
While there are many great investment opportunities in traditional defensive sectors, the principle of diversification should not be overlooked. In 1992, American economist Harry Markowitz famously described diversification as "the only free lunch in investing".
Most experts suggest investors own between 20-25 companies to achieve sufficient diversification. In other words, own enough companies so you're not 'putting all your eggs in one basket'.
However, the type of investment is equally as important as the number.
Investors should consider the degree of correlation between their holdings. For example, Coles and Woolworths shares are likely to be influenced by the same factors, such as regulation. This means their share prices often move in the same direction. We've just seen this with the release of the Australian Competition and Consumer (ACCC) report, which sent these two companies surging last week.
If you already have significant exposure to healthcare, consumer staples, and utilities, it may be time to consider adding other defensive options to further insulate your portfolio.
