Buying certain defensive ASX shares in the next few months could make a lot of sense.
Companies with a strong portfolio of assets could see a resurgence in the coming years as interest rates come down.
When ultra-safe investments like term deposits and government bonds start offering lower returns due to lower interest rates, investors may start looking to other asset categories for better returns.
Infrastructure could be a good pick because of its predictable cash flow. That cash flow (and the distributions) would be more valuable to investors if interest rates were lower.
As Warren Buffett, one of the world's greatest investors, once said:
The value of every business, the value of a farm, the value of an apartment house, the value of any economic asset, is 100% sensitive to interest rates because all you are doing in investing is transferring some money to somebody now in exchange for what you expect the stream of money to be, to come in over a period of time, and the higher interest rates are the less that present value is going to be.
So every business by its nature… its intrinsic valuation is 100% sensitive to interest rates.
With that in mind, I'd want to look at the two defensive ASX shares below.
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Transurban Group (ASX: TCL)
Transurban is a large toll road operator with a presence in Sydney, Melbourne, Brisbane, and North America. Over time, the company has benefited from increasing traffic on its various roads. In FY24, Transurban reported that average daily traffic (ADT) increased by 1.7%.
An increase in the price of tolls helped Transurban grow proportional toll revenue grew 6.7% and proportional operating profit (EBITDA) increased 7.5%.
A fall in interest rates could spur more economic activity in Australia's major cities, leading to more trips on Transurban's roads. Lower rates could also help reduce the cost of Transurban's debt.
The defensive ASX share is working on a few development projects, including the West Gate Tunnel project, on track for completion by the end of 2025. The Logan West upgrade project is another focus, which has progressed to the binding upgrade proposal stage.
In FY24, Transurban grew its annual distribution by 7% to 62 cents per security. It expects to grow its distribution by another 4.8% to 65 cents per security in FY25. That translates into a forward distribution yield of 4.8%.
APA Group (ASX: APA)
APA is a major energy infrastructure business, with assets such as a huge national gas pipeline, gas storage and processing facilities, gas-powered energy generation, solar farms, and wind farms.
This ASX defensive share generates large and growing cash flow from its various assets around the country. As it finishes a new project, the business adds another source of cash flow, which can then fund higher distributions for shareholders.
Energy continues to be important, and growth areas like electric vehicles and data centres could increase the overall demand for energy.
Like Transurban, APA has plenty of debt on its balance sheet, so a future rate cut could help reduce its financing costs.
A rate cut could also lead to increasing economic activity and boost overall energy demand.
In FY24, APA grew its annual distribution per security by 1.8% to 56 cents. It expects to grow its FY25 distribution per security by 1.8% to 57 cents per security, which translates into a forward distribution yield of 7.5%.
