Yesterday we had a data release showing that the UK economy shrank by 20.4% in the second quarter this year. As the first quarter had already seen negative growth, the two consecutive quarters technically means that we’re in a recession here in the UK. That’s potentially an understatement, given that back in the 2008/09 recession, we were seeing GDP shrinking by single-digit percentages. We’re now talking double-digits in a single quarter. With this in mind, what stocks can we look to in order to provide returns despite the poor outlook?
Buy defensive in a recession
Traditionally, investors would now look to buy into defensive stocks. This is a broad term, but essentially refers to firms that operate in stable sectors that see limited correlation between demand and the broader economy. Usually this is down to the goods and services offered. For example, luxury goods makers and mid-market names tend not to perform well during a recession as demand falls significantly. Yet the stock of a cheap fashion retailer like Primark owner Associated British Foods could perform well. After all, demand for clothing still exists.
You can differentiate between the pandemic in the first half of the year and the recession that’s now confirmed, of course. The two situations are very different. But it’s interesting that defensive stocks were a good both in the pandemic to hold for the long term and as we now move into the recession phase, they still are. Defensive stocks are still likely to do well.
A defensive FTSE 100 stock I like
First up is Coca-Cola HBC AG (LSE: CCH). In my opinion, this is a classic defensive stock. During a recession, consumers cut down on expensive purchases, but Coke still happily in may fridges as it’s a mainstream drink. The broad range of appeal that the brand and its other labels like Fanta have, along with the reputation it has built over many decades, allows it to weather any economic storm. The firm itself is not the parent company (this is listed in the US) but it bottles the drinks giant’s products and distributes them in around 28 countries. Therefore the demand of Coke itself is closely correlated to company performance.
I think now in particular is a good time to buy the stock given the recent trading update. The share price fell as revenue was reported to be down 14.7% in the first half of the year. This puts it down 22% from the start of the year. For investors wanting a defensive stock, buying one at a steep discount is perfect for the longer term.
Remember, the main cause of the revenue hit was lockdown. It hampered operations and the ability of clients to buy the product. Going forward, the UK recession we are now in doesn’t currently involve a lockdown. I think Coca-Cola HBC should be able to improve performance as the lockdown problems from the first half of the year are eased.
