The new year has seen the pundits in full flow, predicting the outlook for equities in 2013. Generally, the picture is looking pretty rosy.
A deal to keep the US from falling over the fiscal cliff has gone down well, prompting investors to increase their risk appetites. Equities continued to be buoyed by quantitative easing: it puts downward pressure on bond yields and the money it creates has to end up somewhere, some at least in the stock market. Politicians in Europe seem to be getting their act together, and data coming from China is encouraging.
That's driven the FTSE 100 over the psychological 6,000 barrier already this year. There is some evidence to support the stock market adage that a good January heralds a good 12 months.
But a word of caution: it's a castle built on sand. The market is still driven by nervous risk-on/risk-off sentiment.
The deal over the US fiscal cliff has merely bought time: the country's massive debts haven't gone away. QE can't go on forever. There is plenty of scope for Europe's citizens to inconveniently reject the course set out for them by their political leaders, especially with Italian and German elections in 2013. The new government in China is unknown and untested.
That's good reason to stay inclined towards defensive shares, mitigating the downside if the rosy scenario doesn't play out quite as hoped.
It's dangerous to be too swayed by short-term factors. Long-term investing is best informed by long-term trends. One strong and positive trend driving global wealth is the growth in numbers and prosperity of middle-class consumers in emerging markets.
So here is my pick of five defensive shares that are exploiting emerging market consumer growth. They should do well if markets boom and are good long-term holds if 2013 proves to be more volatile than expected.
1. British American Tobacco
Emerging markets are -- some may say not very ethically -- important growth markets for the tobacco industry, and British American Tobacco (LSE: BATS) has a bigger emerging markets footprint than rival Imperial Tobacco. In the first three quarters of last year, volumes dropped in Europe and the Americas, but held up in Eastern Europe and Asia Pacific. The tobacco industry is under too much attack for this to be a buy-and-forget share, but there's plenty of mileage yet.
Another vice, another emerging market consumer growth story! Diageo's (LSE: DGE) shares enjoyed a storming performance in 2012, up nearly 30%. Sales grew a more modest 6% in its last financial year, but that disguises 18% growth in Latin America and 11% in Africa. A big clue to where Diageo sees its future is in its marketing spend: up over 10% in Latin America, Africa and Asia Pacific compared to half that in Western markets.
GlaxoSmithKline (LSE: GSK) has an explicit strategy of reducing its dependence on 'white pill, Western markets', one strand of which is its emerging market business. Towards the end of last year, it spent £650m to increase its stake in its Indian business from 43% to 75%, and its Nigerian business from 46% to 80%.
Emerging markets accounted for well over half of Unilever's (LSE: ULVR) turnover in the first nine months of last year. What's more, growth there was running at nearly 12% p.a., compared to sub 1% growth in developed markets. The company was an early-mover, and has enjoyed strong sales growth for several years as a result. But with increasing demand and market penetration, there looks to be plenty of future growth yet to come.
Prodigious cash-machine that it is -- especially if its US associate continues to thrive and chuck in a hefty dividend payment itself -- Vodafone's (LSE: VOD) low rating is testimony to concerns over its growth prospects. A price-to-earnings ratio of 11 and yield of 6% makes for a cheap income stock if you believe the payout can be sustained. Emerging markets are one of the key planks to Vodafone's growth strategy, with India, Africa and Turkey key markets.
Three of these shares are held by Invesco Perpetual's Neil Woodford in his Income and High Income funds. Those funds have been stellar performers. For nine years, from 2000 to 2008, they outperformed the FTSE All-Share index. And in 2011, Mr Woodford's funds returned double the index.
To find out which three, and discover more of Neil Woodford's investment approach, you can download this free and newly-updated report from the Motley Fool: "8 Shares Held By Britain's Super-Investor". Simply click here, without obligation. You can learn a lot about stock-picking by seeing what successful investors do.