I have been increasingly noticing the economically dreaded “r” word in the media. While analysts are divided as to whether many global economies including the UK could be headed towards a recession in the near future, investors could benefit from thinking about how to recession-proof their portfolios.
The inverted yield curve
Are we almost at the tail end of nearly a decade of economic growth? Although there have been a few short-lived downturns over the past 10 years, most economies have enjoyed stable growth since the recession of 2008-09.
However, in March this year as well as earlier in December 2018, fears of a US recession that could also spread to other countries hit the headlines as analysts highlighted the inverted yield curve in the US, realised for the first time since 2006. This signal occurs when US short-term treasury notes yield more than longer-term instruments. Many analysts warn that an inverted yield curve may be a sign of an upcoming recession.
We will not know when the next recession has exactly started until we are in it, but generally, the economy and investors’ sentiment can change rather quickly. What looks like a bull market today can become a bear market the next month.
Therefore, if you are of the opinion that an economic slump may be almost upon us, you may want to reconsider your portfolio diversification strategies. Certain industries and stocks tend to do better in times of slower economic growth.
A resilient industry
A defensive company usually has a constant demand for its products or services and isn’t typically correlated to the rest of the business cycle. Healthcare companies are considered to be defensive and their shares might serve investors well in case of a recession. By healthcare, I mean pharmaceutical companies, as well as medical device manufacturers and those that operate healthcare facilities in the industry.
Why is healthcare so defensive? We all get sick occasionally or have friends and relatives who may need treatment for chronic illness. Moreover, according to the Office for National Statistics, the population of the UK is getting older with “18% aged 65 and over and 2.4% aged 85 and over.” Hence the need for more healthcare facilities and drugs.
Growth and dividend income
Although analysts favour the healthcare industry in economically difficult conditions, investors should still employ fundamental growth and analysis metrics diligently when they evaluate company shares. One stock that may be worthy of your attention is the FTSE 100 pharma giant GlaxoSmithKline (LSE: GSK).
When major indices or economies come under stress, more than ever I look for companies that offer fundamental value and growth potential, as well as proven stability. Overall, GSK shares fit the criteria well. Year-to-date the stock is up almost 9%.
On 6 February, GSK released its full-year results and investors happily noted that both sales and profits were up. Analysts have also been excited about the 2018 merger announcement between GSK and its US counterpart Pfizer, creating a leader in over-the-counter (OTC) products. They will spin off their consumer healthcare brands in a new venture of which GSK will own 68% and contribute its top brands, including Theraflu, Sensodyne and Voltaren.
Finally, investors who buy into the GSK share price can enjoy a dividend yield of 5.04%. With its diverse range of products, I think GSK is likely to continue as a high-dividend staple.
