ANALYSIS - Defensive stocks may be winners in a slow upturn

By David Jones

LONDON (Reuters) - Classic defensives such as food and drug shares tend to do better than cyclicals in an economic downturn, but they could also outperform the market on the way up as many analysts say a recovery is set to be slow.

These defensives often underperform once the green shoots of recovery are anticipated, and true to form these stocks have been left behind in the post-March stock market rally, but many offer what has been termed "defensive growth".

"A weak recovery plays well for defensives, we should be happy to be overweight in defensive stocks," said equity strategist Ewen Stewart at Investec Securities.

He said that with a lacklustre recovery seen at best, investors would do well to stay cautious and be prepared to pay a premium for the certainty that comes from big defensives with their staple products and rising exposure to emerging markets.

"Recovery, should it come, is likely to be a mild one. This could also play into the hands of those sectors which offer investors a combination of cheap valuations and reasonable growth prospects whatever the weather," said Citi's strategist Adrian Cattley.

He pointed out that the four big defensive sectors -- food and beverage, healthcare, telecoms and utilities can gain in rising equity markets -- but it is the first two he finds most interesting as they outperformed rising markets in the 1980s.

"We suspect that consumer defensive companies in food, beverages, tobacco, HPC and perhaps healthcare are more likely to fit the bill rather than telecoms and utilities," he said.

In this area, Citi analysts have picked food groups Nestle and Unilever Plc/NV, cigarette maker BAT, home and personal care (HPC) group Reckitt Benckiser with drug groups GlaxoSmithKline Plc and Sanofi-Aventis among its top ten defensive picks.