[Beginner Investor Guide] They Say to Invest in 'Defensive Stocks' During Interest Rate Hikes... What Are Defensive Stocks?

[Asia Economy Reporter Kwon Jaehee] The U.S. Federal Reserve (Fed) has implemented three consecutive giant steps (raising the benchmark interest rate by 0.75 percentage points at once) to curb inflation, which has significantly shaken our stock market. The KOSPI fell below the 2300 mark, with new lows emerging one after another, making it difficult to figure out which stocks to invest in. However, investors cannot just watch from the sidelines. Have you heard of 'defensive stocks' as an investment option that can generate profits even in a sluggish economy? Let's find out what defensive stocks are.

What are defensive stocks?

Generally, we think that a company's performance is sensitive to the economy. Semiconductors are a representative example. When the economy is booming, products like PCs and smartphones sell well, which increases the demand for semiconductors. These are called cyclical stocks.

Defensive stocks are the opposite. They refer to companies that maintain steady performance regardless of economic conditions. What companies come to mind? Insurance, telecommunications, and food companies are typical examples. People don't cancel their phones or reduce their meals from three to one a day just because the economy feels bad.

In fact, on the 23rd, when the KOSPI index fell below 2300, the only sectors that rose were telecommunications (1.48%) and insurance (1.27%). The day before, food and tobacco (3.46%) and telecommunication services (0.66%) also closed higher.

Looking at individual stock price trends, defensive stocks have shown upward momentum. On the 22nd, Hanil Feed rose 29.94%, and the next day it closed up 4.35%. Other companies like Hantop, Daehan Flour Mills, CJ CheilJedang, and SPC Samlip also showed good performance.

Ahead of Chuseok, there is an emergency regarding the price of food on the table. According to the National Statistical Portal (KOSIS) of Statistics Korea, the food and non-alcoholic beverage price index in July was 113.12 (2020=100), up 8.0% from a year earlier. Food prices rose the most in one year and five months since February last year. In particular, prices of processed foods such as edible oils (34.7%) and fresh foods such as vegetables and seaweed (24.4%) increased significantly. Citizens are shopping at a large supermarket in downtown Seoul on the 7th. Photo by Moon Honam munonam@

Why are defensive stocks attractive during recessions but overlooked in the stock market?

At first glance, defensive stocks seem like attractive investments because they generate steady profits regardless of economic booms or recessions. However, in the stock market, defensive stocks often fail to receive proper valuation because, while stable, they lack growth potential.

The stock market values growth potential more highly than stability. Tesla is a prime example. Even during periods when Tesla was not profitable, its stock price soared solely based on future growth prospects.

Unless the stock market is generally depressed due to high inflation and recession concerns like now, it is more advantageous to invest in industries with growth potential rather than defensive stocks.

In the past, the domestic food and beverage sector was a representative industry with stable performance but unrecognized growth potential, resulting in poor stock performance for several years. However, since the COVID-19 pandemic began in 2020, it has transformed into a growth industry. As dining out became restricted, demand for processed foods and ready meals increased, and exports grew, successfully turning it into a growth sector. Stock prices also began to rise, shaking off long-term stagnation.

There is no eternal 'blue-chip' stock in the stock market. It changes according to economic conditions. Carefully observe macroeconomic trends and adjust your portfolio with stocks that fit the times. Even in a collapsing market, some stocks will rise. We support wise investments by beginner investors today as well.

Editor's Note [Beginner's Guide to Stocks] is a smart investment guide for 'Joorini' (stock + beginner). We will kindly and easily explain stock stories unfamiliar to beginners.