UK Chancellor Rishi Sunak has warned that the UK is likely to be in a significant recession. This will hit business confidence and investment, consumer spending and growth. Just this week unemployment has risen, despite the extended furlough scheme the government has put in place. For some investors, this would be a time to take a wait-and-see approach and hold cash before investing. That approach is understandable, but so is investing in shares with good long-term prospects.
Asian growth
One company with improving long-term prospects, in my opinion, is the insurer Prudential (LSE: PRU). Recently the company has been hit by the Chinese reaction to Covid-19. It has revealed this month that Q1 sales slid by nearly a quarter in Asia. A recovery in the region is already under way.
After spinning off M&G, Prudential is now left with a greater focus on the growth of its insurance operations in Asia. It also has businesses in the US and Africa, although the US arm, Jackson, is also likely to separate at some point.
Before Covid-19, the company was doing well. When you go back to results from early March, Prudential was reporting operating profits up 20%. For a big company that’s a very high figure.
On a P/E below eight, I think the shares are currently attractively priced given the growth opportunities and the quality of the company. If you believe China and the wider Asia region could do well in the next decade, then Prudential is up there as one of the best ways to tap into that growth.
Shares that hold value in a recession
Tobacco producer Imperial Brands (LSE: IMB) yesterday cut its dividend by a third. Not the best news for income investors, but it does still have a yield greater than 8%. The shares are particularly good in a recessionary environment because demand for the product shouldn’t go away. That’s why dividend cuts by the big tobacco companies are rare.
The dividend cut is part of an aim to reduce debt. As is the sale of its premium cigar business for €1.2bn. The two moves are understandable when there’s pressure on tobacco companies from governments around the world. Also, the success of next-generation products such as vaping are also still unproven and hang in the balance.
On the upside, the company doesn’t expect coronavirus to have a massive impact on earnings. Earnings will likely fall between 2%-4% it says.
The combination of its income, loyal customers and scale mean I think Imperial Brands can still add value for investors, alongside the cheapness of the shares, which gives investors some margin of safety as the P/E is only six.
These positives are even more important as we find ourselves in a recession that will hit industries such as retail far harder. It won’t be an easy ride for investors, given the tobacco industry’s challenges, but it could be a profitable one.
