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FTSE 100 stocks continue to be the most popular destination of capital among British investors, especially now that the US stock market is starting to look a bit shaky.
Despite incoming economic headwinds created by tariffs, many American stocks, particularly in the tech sector, are reaching all-time highs, creating concern among experts of a potential correction, and possibly even a crash in some of the more extreme projections.
With that in mind, does investing in the FTSE 100 over US stocks actually make sense? Here’s what history tells us.
Historical correlation
The FTSE 100 has a vastly different sector make-up compared to a US index like the S&P 500. The latter is heavily weighted towards technology stocks, while the UK’s flagship index is more concentrated in healthcare, finance, and energy.
This broader diversification across more defensive sectors is why the FTSE 100 has historically been less volatile. And yet, during a stock market crash, it remains just as susceptible to sharp declines as other leading indexes:
- In 2020, it collapsed by around 30% in the space of just a few weeks, just like the S&P 500.
- In 2008, both the S&P 500 and the FTSE 100 fell by roughly 50%.
- During the dotcom bust of 2000 to 2002, both indexes were also down by around 50%.
Put simply, both UK and US stocks are highly correlated during times of widespread panic. Yet the story is quite different during milder market corrections.
As we’ve recently seen with the inflation-driven 2022 correction, FTSE 100 stocks actually vastly outperformed the S&P 500, delivering flat results versus a 20% drawdown in America.
Without extreme fear spreading from one market to another, the more diverse and resilient composition of the UK index results in lower levels of volatility. It also helps that with the bulk of earnings actually coming from overseas, a weakening pound can create a favourable tailwind.
The result is that investors are often able to better protect their wealth and sometimes even grow it.
Which stocks to consider
Most experts believe that a US stock market correction is currently far more likely than a full-blown crash. With that in mind, which FTSE 100 stocks should investors be considering as a potential defensive investment?
In my opinion, the secular demand of large-cap healthcare enterprises like AstraZeneca (LSE:AZN) is a good place to start.
The group’s development pipeline puts it in a leading position among cancer pharmaceutical businesses, with its existing portfolio delivering impressive double-digit growth. At the same time, management’s recently announced $50bn multi-year investment programme to expand its R&D and manufacturing capacity could help maintain its current trajectory into the long term.
Of course, no investment, even the most resilient-looking, is risk-free. Like many big pharma companies, AstraZeneca is facing a patent cliff with several blockbuster drugs at risk of being replicated by generic manufacturers.
New treatments from its pipeline will help offset this impact, but that nonetheless involves significant execution risk. Don’t forget that developing new medications is exceptionally challenging and expensive. And there have been numerous cases where even the most promising late-stage drug candidates fail to reach the market.
Regardless, for investors feeling nervous about the US stock market, investigating defensive businesses like AstraZeneca and other FTSE 100 opportunities is worthwhile, in my opinion.
