If the dire economic warnings from analysts prove correct, a recession is now very much on the cards. Rather than ruminate on this, I’m taking the bull by the horns and identifying which UK shares to buy with the goal of at least preserving my capital. Here’s my take.
‘Recession-proof’ UK shares
With the possible exception of anything racey in the biotech world, most health stocks tend to hold their own in recessionary times. Regardless of how the economy is performing, people get ill and/or need ongoing medical support. It’s this predictability that I think makes shares in this space worth researching further.
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My personal favourite remains GlaxoSmithKline (LSE: GSK). A valuation of 14 times earnings before markets opened on Friday still looks very reasonable, considering it’s a global leader in developing and manufacturing medicines and vaccines.
This is not to say that an investment in GSK isn’t without a few issues. There’s a lot going on behind the scenes as the company gets set to spin off its consumer healthcare division (Haleon) in July — a move that has forced a big reduction in the dividend. After a few lacklustre years, CEO Emma Walmsley also remains under intense pressure to grow profits.
To quell some of these concerns, I’d also consider an investment in Primary Health Properties (LSE: PHP). As it sounds, Primary is a Real Estate Investment Trust (REIT) that buys healthcare-related properties and then lets these out long term to GPs and other medical professionals.
Right now, there are no less than 523 facilities on its books, 99.7% of which are occupied. A recession won’t change that, especially given the psychological scar left by a two-year pandemic. A mere 4% reduction in the PHP share price in 2022 (as of Friday morning) supports this view.
In addition to the stability it offers, Primary offers a chunky yield of 4.5%.
Dull but defensive
As difficult as the energy price rises we’ve seen over recent months have been for consumers, they’ve also highlighted just how dependent we are on electricity, gas and water. Seen purely from an investment perspective, there’s no shortage of options for me to tap into this defensiveness.
My usual go-to utility is power provider National Grid (LSE: NG) and I’m not about to change my mind. Despite being about as dull as a listed stock can get, the company is also incredibly defensive.
On the downside, National Grid isn’t quite the bargain it used to be. Having climbed 13% in value in 2022, shares trade at a P/E of 19. That’s far above the five-year average of 13.5 times earnings.
Notwithstanding this, the Grid is still cheaper to acquire than other utility-related stocks at the moment. And at 4.2%, I think it’s worth buying for the dividend yield alone.
Buy on weakness
Recession or not, everyone will still need to eat and keep clean. For me, that makes owning stock in a company from the consumer goods space essential. I’d go for Unilever (LSE: ULVR) here. That almost sounds controversial these days.
The FTSE 100 juggernaut hasn’t exactly been in many investors’ good books lately, due to flagging earnings growth and, according to star fund manager Terry Smith, an obsession with showcasing its ethical credentials. However, this is still a fundamentally good business, boasting great returns on capital and high margins.
Unilever also has a worldwide presence, meaning it is not too dependent on one geographical area for earnings. As a result of growing affluence in emerging markets, there’s lots of potential ‘white space’ left for the company to grow into too. From Marmite and Ben & Jerry’s to Domestos and Comfort, the company’s bursting portfolio of 400 brands are recognisable and in constant demand.
“Why not add a supermarket too?“, I hear you cry. Well, I’m not against this idea. However, the level of competition in this part of the market shouldn’t be underestimated. And, during recessionary times, I think it’s the German discounters Aldi and Lidl, whose tills will be ringing more frequently than listed rivals. As such, I’d prioritise buying shares in companies whose products will be sold universally rather than who is selling them.
Yesterday, Unilever shares traded at 17 times earnings. That’s lower than its average over the last five years. To me, this looks great value for what remains a high-quality company, albeit one that — regardless of a looming recession — needs to recapture its form.
For me, the biggest risk here is the ‘opportunity cost’. In other words, it’s the profits I could potentially lose out on through investing here and not in other UK shares capable of growing quicker. On a more positive note, there’s a 4.2% dividend yield on offer while I wait.
I’d also add B&M European Value Retail (LSE: BME) to the mix. The FTSE 100 company was a huge beneficiary of multiple UK lockdowns after being awarded ‘essential’ status by the government and permitted to keep its stores open.
Since then, sentiment around the stock has dwindled, not helped by the recent announcement that long-standing CEO Simon Arora is to retire next year after 17 years. Full-year numbers from B&M, due next week, may also struggle to impress an increasingly skittish market.
Despite this, it does feel like a lot of the current market headwinds are priced into the shares. Fittingly, a P/E of 11 for the new financial year already looks good value to me. A 5.4% dividend yield, safely covered by profit, is also in the offing.
Don’t get me wrong – I suspect things will be tough for most retailers going forward. However, if there’s one business plan in this sector that should work in troubled economic times, it belongs to B&M. As incomes get stretched, we instinctively look for bargains. Another purple patch for B&M could lie ahead.
Safety in numbers
Of course, no one knows for sure what the future holds. History can only show us what has worked previously when it comes to identifying which sectors tend to be immune to the economic cycle. As we’re repeatedly told by money managers in the City, ‘past performance is no guide to the future‘.
This is why it’s important to spread my money across multiple sectors, as I’ve attempted to do above. If healthcare stocks take a tumble, my utility stock should help mitigate the damage done. If consumers shun labels, a discount retailer will be there to help.
It’s not a perfect plan, but it is a Foolish one. And that’s good enough for me.