National Grid is favoured defensive play

The broad stock market has been exceptionally strong of late. However, investing in equities remains a risky business and despite the fact that the market has been upbeat in the middle part of the year so far, things can change very quickly.

Bearing in mind the potential for another loss of confidence from investors, it is worth looking at defensive stocks, several of which look to represent good value.

One of our favoured defensive plays is National Grid, the electricity and gas company which is focused on the UK and US. Having peaked at 863p in early 2008, the shares have since been out of favour and have not really participated in the recent rally.

Trading at around ten times forecast earnings for the current year and yielding over 6per cent even on a historical basis, there is a strong case for saying that the share price could move higher.

Looking at long term averages, shares of the quality of National Grid tend to trade at a higher multiple of earnings than ten.

Also, looking at current conditions it could be that the yield provided by National Grid is difficult to find elsewhere, especially amongst blue chips.

One key negative is the level of borrowings, although it should be remembered that the debt is manageable given the level and quality of earnings. Interim results are due in November, but the nature of the business National Grid conducts means that surprises are unlikely.

On balance, those looking for a steady long term play which provides a good yield and the prospects of some capital growth could certainly find worse homes for their money than shares in National Grid.

In terms of where the stock market is heading, opinion is very much divided.

Bulls believe that a level of 5,000 is not far away for the FTSE 100 and that the index could end the year even higher. On the bear side, there are many observers urging caution and even some forecasting a fall to below the lows of around 3,500 seen earlier this year.

As always, it is difficult to predict exactly where the market is heading. The debate as to where the world economy is going is equally divided. As ever, hindsight will prove to be a wonderful thing and the only certainty is that there will be some interesting times ahead.

WARNING: Opinions expressed are the writers’ judgments at the time of writing. The information does not constitute a personal recommendation and readers should seek professional advice as to the suitability of the investments.

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