Market watch: When the upturn is as hard as the down

Its saviour, Germany, usually the engine room of European growth, has seen its recovery stall. Sterling has remained weak (not necessarily a bad thing), there has been a marked increase in prominent strikes, and consumer confidence has fallen in the US (an economy I still believe has a promising 2010 ahead).

There is some corporate activity, however, with Prudential's $35.5bn (£23.5bn) purchase of insurance giant AIG's Asian operation perhaps the biggest. And when the corporate sector starts spending money, it is usually good news.

But where might investors look? If the mainstream opinion of analysts is to be believed, this is not the stage in the market cycle that would traditionally favour defensives such as the utilities, but there are a number of reasons to think again.

The most obvious of these is that such market conditions warrant some substantial exposure to defensive stocks. This is hardly a textbook market recovery after all. There is a certain amount of security in big, solid businesses offering predictable returns.

But there are more intrinsic attractions in sectors such as the utilities and not only because this coldest winter in three decades has increased demand for their services and increased their profits. More fundamentally, utilities underperformed in 2009. They began the year with questions being asked of their liquidity, to be followed by a raft of regulatory issues.

Then, once the market regained confidence, it was the sector's defensive qualities that made it unattractive as investors searched for glory. The result is a sector trading on relatively low multiples that is actually doing rather well, with decent earnings prospects. It offers a decent yield and, as a defensive, perhaps suits investor tastes once again.

The yield is all the more attractive in light of recent inflation numbers that I talked about in my last column. One of the best hedges against the erosion of price rises is a combination of capital growth and income. And when capital growth is elusive, a bit of income can be very welcome.

Furthermore, reinvested income can make an astounding difference to total returns over a few years. Just don't forget to make portfolios as tax-efficient as possible by ensuring dividends are paid in tax-efficient wrappers such as Isas or Sipps.

However tentative it might be, this remains the first economic and market recovery where investors really do have access to every corner of the world. Rarely has diversification been more important, and rarely has it been more accessible. In such turbulent markets, investors have to select carefully, but it is clear that old faithfuls like the defensive utilities still have a place in most lists.