According to EY ITEM Club — a non-governmental forecasting group that uses HM Treasury’s model of the UK economy — Britain’s economy is set to slow over the next few years.
The organisation’s best guess is that a rise in inflation will lead to shrinking consumer spending and falling business investment, which will likely lead to gross domestic product expanding 1.9% this year, 0.8% in 2017 and 1.4% during 2018.
London-listed internationals
That forecast doesn’t sound too bad to me, although things could get worse. It makes sense to position a portfolio of shares so that it doesn’t depend too much on outcomes for the British economy.
That’s easy to do on the London stock market because many shares, particularly in the FTSE 100, are backed with large internationally trading businesses. For example, consumer goods firm Unilever’s (LSE: ULVR) stable of well-known detergent and food brands such as Domestos, Hellmann’s, Marmite and Surf keep a steady stream of cash flowing in as consumers buy, use up and re-buy their favourite brands.
The firm is considered to be defensive because revenues and profits tend to remain steady during economic downturns. The firm deals in ‘essentials’ and customers keep buying despite trimming spending on other things when times are hard. However, despite Unilever’s resilience to economic downturns, I reckon the firm’s global reach will help dilute the effect of any weakness specific to the UK economy that may be on its way.
At today’s share price of 3,517p, you can pick up the shares on a forward price-to-earnings (P/E) ratio of just over 20 for 2017 and there’s a forward dividend yield running at almost 3.3%.
Extra defensive
British American Tobacco (LSE: BATS) also deals in consumer goods, in this case, tobacco products. Just like Unilever, BATS is considered to be defensive because of steady, predictable cash flows. I would argue that customers’ addiction to the product makes the firm’s business even more defensive than Unilever’s and therefore even more resistant to general macroeconomic weakness.
Once again, it’s the firm’s worldwide operations that I think will protect the business from any convulsions we might see in Britain’s economy. At today’s share price of 4,828p, BATS changes hands on a forward P/E rating of just over 17 for 2017 and there’s a forward dividend yield of 3.7% with the payout covered 1.5 times by predicted forward earnings.
Essential products
GaxoSmithKline’s (LSE: GSK) pipeline of new drugs looks set to rebuild the firm’s profits in the years ahead after a loss of patent exclusivity pulled the rug from previously profitable lines. Although the firm is a big drug developer, it also has a lot in common with consumer goods businesses such as Unilever and BATS. Medicines are consumable goods, often repeat purchased and rarely missed out, no matter how deep a recession we find ourselves in.
At a share price of 1,673p GlaxoSmithKline sits on a forward P/E rating of a little over 16 for 2017 and has a forward yield of just under 4.8% covered almost 1.3 times by predicted earnings.
