Which stocks should I buy in a recession? It’s a question that will be worrying investors after the yield curve on US government debt inverted briefly last week.
In plain English, this means that it became cheaper for the US government to borrow money for 10 years than for two years.
What’s wrong with that?
In general, it’s cheaper for governments to borrow money for short periods than long periods. The long-term future is normally more uncertain than tomorrow.
However, if investors fear a recession, they sometimes prefer long-term lending over short-term risk. Over the last 150 years, an inverted yield curve has predicted 85% of US recessions.
With this in mind, I’ve selected three FTSE 100 stocks I’d buy for my Stocks and Shares ISA in a recession.
Essential services
Of all the recession-resistant stocks I’d buy, supermarket giant Tesco (LSE: TSCO) is probably top of the list.
When money is tight, shoppers tend to seek out the best prices on everyday purchases. I’d expect Tesco’s 27% share of the UK market to give it an advantage over smaller rivals.
Admittedly, Tesco faces the same pressures as other retailers from rising food and energy costs. But the group’s purchasing power and scale should help it to maximise profit margins without putting up prices.
It’s worth remembering that during the last big recession in 2008/09, Tesco’s annual profits and its dividend continue to rise.
Today, Tesco shares trade on 13 times forecast earnings, with a dividend yield of 3.9%. That looks a fair price to me. I’d be happy to buy the shares for my ISA today.
A recession stock
Defence stocks aren’t usually affected too badly by recessions. Spending plans for major projects are often spread over many years and agreed far in advance.
FTSE 100 defence group BAE Systems (LSE: BA) has a big presence in the US and UK markets. The group has a diverse mix of activities, including shipbuilding, aviation, electronic warfare and cyber security.
BAE hasn’t cut its dividend for 30 years and profits have risen steadily since 2017. Rising interest rates could also help to cut the group’s monster pension deficit.
The main risk I can see today is that BAE’s share price has already risen by around 30% this year. The shares don’t look such good value to me as they did a few months ago.
Even so, I’d be happy to buy BAE stock for my ISA today. I reckon it should remain a reliable performer.
A defensive 7% yielder
Like supermarkets, tobacco stocks often perform well in a recession. British American Tobacco (LSE: BATS) is a stock I’d add to my ISA today to help boost my income.
With a 7% dividend yield and reliable cash flow, BATS is already a familiar choice among income investors. Of course, this business carries ethical concerns and regulatory risks. There’s always the threat of tighter restrictions on cigarette sales.
However, sales of BATS’ less risky products such as vapes are growing fast. The company gained 4.8m new customers for its non-combustible products last year. These are expected to generate 15%-20% of annual sales by 2025.
In the meantime, brands such as Lucky Strike and Camel remain reliable performers. I’d be happy owning BATS stock in a recession.
