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When volatility picks up, investors rotate toward businesses with steady cash flows, pricing power and balance sheets built to ride out a downturn.
Defensive stocks are the companies whose earnings hold up whether the economy is booming or slowing. On the ASX that has traditionally meant supermarkets, healthcare, utilities and toll roads — businesses selling things people keep buying regardless of the headlines.
What makes a stock defensive
We look for three things: revenue that does not swing with the economic cycle, a balance sheet with modest debt and long-dated maturities, and a track record of maintaining or growing the dividend through past downturns. Pricing power matters too; a company that can pass inflation on to customers protects its margins when costs rise.
Where we see value today
Healthcare names have come back to more reasonable multiples after a strong run, while the regulated utilities offer yields that compare well with term deposits once franking credits are included. In consumer staples we prefer the operators with scale and private-label leverage over the smaller, more indebted retailers.
The trade-off
Defensive does not mean risk-free. These companies tend to lag sharply in a strong bull market, and several trade at premium valuations precisely because of their stability. The goal is not to hold only defensives, but to make sure a portfolio has enough of them to stay invested through the rough patches without being forced to sell at the bottom.