In the current climate of escalating trade tariffs and heightened market volatility, the strategic appeal of a defensive stock portfolio emerges prominently.
This article explores how we can construct a defensive stock portfolio with the help of Trading Central's Strategy Builder, examines the rationale behind the selection criteria, and backtests its performance during periods of market instability.
Back in early 2022, we set up a defensive strategy for the Hong Kong market when the benchmark Hang Seng Index had already fallen more than 20% from its last peak, indicating the onset of a bear market.
At that time, market sentiment was dampened by the Chinese property sector crisis and geopolitical uncertainty, causing valuation contraction due to a continuous increase in the risk premium.
Setting Up Defensive Strategy
Hence, in Trading Central's Strategy Builder, we applied the criteria: "Dividend Yield > 5%", "Debt to Equity Ratio < 1", "Market Capitalization > HKD$100 billion", and "Price/Book Ratio < 1" when screening stocks.
This is how the strategy outperformed the benchmark index over the last five years (blue line portfolio vs red line benchmark Hang Seng Index):
Rationale Behind Selection
High Dividend Yield: High dividend yield stocks are sought after for their income generation, risk mitigation, and indication of financial health. They are often perceived as safer bets, as the dividend provides a return regardless of market conditions.
Large Market Capitalization: Large-cap companies are typically well-established leaders in their industries with a proven track record of stable performance. This stability makes them less volatile compared to smaller companies, which can be more susceptible to market fluctuations.
Low Debt to Equity Ratio: Companies with high D/E ratios are generally considered riskier as they have more debt. This can be particularly problematic during periods of economic downturn, when the company might struggle to meet its debt obligations.
Low Price/Book Ratio: A low P/B ratio may indicate that the stock is trading at a price lower than its asset value, suggesting potential undervaluation.
Nonetheless, there are much more selection criteria available in Strategy Builder to incorporate with different preferences:
To Make Investment Research Easier with AI Assistant FIBI:
After constructing a mock portfolio, investors may want to find out more about individual stocks before making decisions. Trading Central's FIBI offers AI-powered analysis, making investment research more efficient:
In conclusion, a defensive stock portfolio is often a prudent choice during economic downturns due to its inherent stability, lower volatility, potential for regular income through dividends, and resilience against economic fluctuations.
These characteristics make defensive stocks a valuable component of a well-diversified investment strategy, particularly for risk-averse investors or those prioritizing income and capital preservation.
