With its latest move, the Fed has all but conceded that without extraordinary measures, the U.S. economy would remain stagnant at best for the next two years. In response, stock market investors have turned away from stocks with high profit potential, in favor of defensive plays designed more to preserve their capital than to build it.
But with everyone looking for the same solutions to the problem, the stocks that most investors turn to are getting crowded. Ideally, you'd like to find companies that other people haven't thought of, but which share the protective traits of those more popular choices. Thanks to an exchange-traded fund, it's easier than ever to identify exactly those stocks.
Looking past the obvious
Here in the U.S., investors are piling into industries that have better prospects for holding their own in a recession. One of most obvious sectors is consumer staples. Although cash-strapped consumers can put off or cut back on discretionary spending, they often can't do without the goods that consumer-staples companies make.
Still, there's only so much that defensive stocks can do. With the broad U.S. stock market under serious pressure, even consumer-staples stocks haven't been able to avoid losses. But as Barron's noted yesterday, even though domestic consumer staples companies lost ground during yesterday's market rout, the iShares S&P Global Consumer Staples ETF (NYSE: KXI) managed to post a big rise.
Why you should go abroad
Given how global the economy has become, you might not understand this disparity. But foreign consumer giants have a couple things going for them that their U.S. counterparts don't.
First, the depreciation of the U.S. dollar versus most foreign currencies boosts shareholder returns on foreign stocks in dollar terms. Even if a foreign stock merely treads water in its home country, a falling dollar means that its shares will be worth more to U.S. investors.
But more importantly, consumer-oriented companies in different countries have direct access to much different populations than U.S. companies do. If current trends continue, AmBev (NYSE: ABV) could thrive from continuing growth in Latin America, even if U.S. consumption stays flat or drops. And although London-based Diageo (NYSE: DEO) and Unilever (NYSE: UL) both do plenty of business in the U.S., they also do big business both across the continent and throughout the rest of the world.
Going where the protection is
The thing about foreign investing is that it can be complicated. One of the biggest consumer companies in the world, Nestle, doesn't sell shares on major U.S. exchanges. The same goes for British retail giant Tesco plc. That's where a fund like the iShares Global Consumer ETF can come in handy.
But you don't have to rely on ETFs for many of these foreign companies. British American Tobacco (AMEX: BTI), FEMEX (NYSE: FMX), and Brasil Foods (NYSE: BRFS) are just a few of the international companies in that ETF that individual investors can buy through traditional brokers without any extra effort. Moreover, they offer a wide cross-section of the consumer staples space -- one that would give you a nicely diversified portfolio of economically attractive stocks in this defensive sector.
Now granted, foreign consumer stocks are definitely not risk free. Foreign economies fluctuate just as much as the U.S. economy does, and several of these companies -- especially Nestle -- face the downside of a strong currency that all exporters have to deal with.
Still, you could argue that there's less risk with many of these names. And the fact that many U.S. investors overlook them -- or simply dismiss them out of hand -- could make them better values than their counterparts closer to home.
So if you're looking for defensive stocks to protect your portfolio, you should give foreign consumer staples stocks a closer look. Whether you use an ETF or buy the individual stocks separately, they may get the job done for you.
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