Fears about global growth sent FTSE 100 shares sharply lower this week. It followed even greater weakness in US shares prompted by a downbeat earnings report by retail chain Target.
With a risk of recession rising in the UK, which FTSE 100 shares should I buy in this environment?
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I’d focus on owning relatively defensive shares right now, so I would avoid retailers completely. At the top of my buy list is renewable electricity provider SSE (LSE:SSE). What I like about it is that despite being a utility company, it also has elements of growth.
As the UK’s leading generator of renewable electricity, it operates in a key area of focus for the coming years. Given recent events in Ukraine, shifting away from a reliance on natural gas has become even more important for many western governments.
SSE is a well-managed business that delivers a double-digit profit margin. As is common with utility companies, it sports an above-average dividend yield. It currently yields 4.6%, which is comfortably ahead of the FTSE 100 average yield of 3.8%.
Bear in mind that if the UK avoids a recession, utility shares including SSE might disappoint. That said, I’d still be able to enjoy its healthy dividend.
FTSE 100 defensive leader
Next I’d consider Imperial Brands (LSE:IMB). Tobacco shares can often have the most defensive characteristics, and Imperial is a leader in this sector. It should be able to pass on rising costs in the form of higher prices without negatively affecting demand for its products. That’s a valuable ability to have in times of rising inflation.
I’d also buy the shares for its chunky dividend. It currently yields a whopping 7.7%. Often, high dividends are prone to cuts if earnings can’t keep up. But that doesn’t look likely with Imperial. Its earnings more than cover what it plans to distribute in dividends.
That being said, smoking rates are falling globally, and future earnings will need to be considered. Imperial is undergoing a transformation plan that includes focusing on its most profitable regions as well as launching its faster-growing next-generation products (NGP).
Overall, I reckon it’s a good defensive Footsie share that I’d comfortably own in a recession.
Conservative top pick
The next share I’d consider is pharmaceutical giant Astrazeneca (LSE:AZN). It’s the second largest company in the FTSE 100. What I like about this share is that it’s a global and conservative healthcare business. As such it has exactly the type of defensive properties I’m looking for right now.
But that’s not the only reason I’d buy these shares. Astrazeneca has strong competitive advantages that should drive earnings over many years. Among its peers, it looks like it could be the most efficient when comparing R&D spend to sales.
Bear in mind that there are regulatory risks when it comes to new drugs and vaccines. That said, it has several drugs in its pipeline in key growth areas. This should enable double-digit earnings growth going forward. This combination of future growth prospects and defensive characteristics is why I’d buy this FTSE 100 share today.