Against a backdrop of concerns over economic growth and heightened market volatility, Mark Peden, co-manager of the Aegon Global Equity Income Fund, examines three defensive stocks that are well-positioned for a slowing economic environment.
Linde plc, the world’s largest industrial gases company, was formed in 2018 when Germany’s Linde AG merged with US firm Praxair, although its heritage traces back to 1879. It manufactures atmospheric and process gases that are required in a wide variety of industries such as steel, chemicals, energy, electronics, and healthcare, as well as providing engineering solutions and decarbonisation technologies.
Given the oligopolistic nature of the gases industry – with effectively only three players now controlling the market – and a reliance on long-term, inflation-linked take or pay contracts that numb the sensitivity to downturns in industrial production and provide unrivalled cashflow visibility, the stock is a fantastic defensive compounder. It has beaten earnings-per-share estimates in every quarter since the merger, now twenty-eight in total, and has grown the dividend every single year for the last thirty-three consecutive years, making it a classic “Dividend Aristocrat.”
Although the company is strongly shielded from economic downturns it also provides nice upside capture in the good times too as gas volumes grow when industrial activity picks up. This arguably makes it an ideal investment for all seasons. Delivering mid-to-high single-digit annual revenue growth, small positive increments to operating margins, an active share buyback programme and a growing dividend, the company is very well placed for investors to enjoy a lower-beta, highly attractive annual total shareholder return regardless of the economic backdrop.
Singapore Telecom [SGX:Z74]
Telecoms are the definition of traditional, low beta defensive companies that should be well-insulated from an economic slowdown. For both individuals and companies alike, connectivity is not a discretionary spending item, nor is it typically a large part of their overall spending, meaning it’s unlikely to be the first thing they focus on when they need to make savings. This means telcos businesses have revenues that are fantastically sticky and visible into the future.
That’s not to say we love them as investments. In fact, the opposite is true. Telcos typically carry a fair bit of debt, and the flipside of their well established, stable business models means they achieve little growth. What makes Singapore Telecom (SingTel) so interesting is that it provides the low beta defensiveness you would want from such a stock, but one that has more exciting growth potential than you get from most European or US telcos. It also comes without a highly levered balance sheet.
SingTel is the largest telecom service provider in Singapore and second largest in Australia through its ownership of Optus. It has strategic investments in providers across Asia, giving it access to dynamic, fast growing economies with favourable demographics. Over the past couple of years, management has successfully executed its aim of increasing returns at these operating companies and with further plans to recycle capital from these back to shareholders, the c. 4% dividend yield looks well supported.
On top of the core telcos business, the company has an IT services arm and a digital infrastructure arm, the latter focused on data centres, meaning it has exposure to the AI revolution. This provides SingTel with diversification and growth optionality.
TSMC [TPE:2330]
In years gone by, you would have been laughed out of the room had you suggested technology was a good place to invest for a slowing economy but one could argue that many large tech companies have the characteristics that investors look for in defensive stocks; established competitive moats, significant revenue visibility, strong balance sheets and incredibly durable, cash generative business models.
Companies are as unlikely to rip out their Office 365 or their cyber security subscription in an economic downturn as consumers are to stop buying toothpaste and bread. These products could now be considered the staples of modern society (but ones that generate significantly higher margins and cash flows than their traditional peers). They are also less prone to physical disruption through supply chain dislocations or rises in input costs.
The semiconductor industry is inherently cyclical but, with AI and high-performance computing (HPC) providing multiyear tailwinds, and supply-demand dynamics firmly in their favour, Taiwan Semiconductor Manufacturing Company – TSMC – is arguably one of the most defensive businesses in the world right now.
Its scale is also vast. At around a 70% share of the global semiconductor foundry market, it is the dominant player. Its technological lead over rivals means this share rises to over 90% for the most advanced chips – a near monopoly.
Given its position in the supply chain, TSMC has deeply ingrained relationships with its customers (the likes of Nvidia and Apple), working closely with them through the process of designing and manufacturing chips. This is a process that takes several years from start to finish for each generation of chips which, combined with customers having to reserve capacity well in advance, provides significant stickiness of customers and visibility of revenues. Whilst exact figures are not disclosed, management have made it clear that their advanced nodes are effectively booked out for the next couple of years.
In order to meet the huge demand, TSMC is spending significant amounts on capital expenditure. Its forecast for 2026 is $52bn – $56bn, which is more than the market cap of all but the largest 20 companies in the UK. Despite this, it will still generate vast amounts of free cash flow and has a net cash balance sheet, which has enabled it to pay rapidly increasing dividends in recent years. In fact, it was the world’s fifth largest dividend payer in 2025 and the $3.6bn increase in the amount it distributed versus the previous year was the largest of any company in the world.
If you thought the world economy was slowing and you found a company with long term customer relationships, capacity substantially booked for the next couple of years, a net profit margin in the mid 40s, no net debt and a rapidly increasing dividend, you would be excited. All of this for a forward P/E ratio in the mid 20s does not sound egregious. Maybe it is time for us to rethink the traditional definition of a ‘defensive’.
