With a recession looming, it seems like a good time to think about what that might mean for your share portfolio. I have been thinking about whether I own the sort of recession shares in my ISA that may hopefully hold up, even in an economic downturn.
Defensive shares
Three of the shares I own are Unilever, British American Tobacco and fellow cigarette maker Imperial Brands.
Interestingly, all three names popped up in some recent research by eToro. The firm has come up with a ‘recession basket of UK shares. This outperformed the FTSE 100 by 29% during the 2007-9 global financial crash. It also beat the FTSE 100 by 13% during the market turbulence in the first half of 2020. It includes pharma names like GSK and AstraZeneca, but also less obviously defensive shares like publisher Pearson.
So what do these recession shares have in common?
Strong demand
One of the ways in which a recession can trip up companies is by leading customers to spend less. Both household and business customers may cut back on their expenditure.
By contrast, some companies benefit from business models that mean customer demand tends to be robust. These typically include tobacco and pharma shares, as the eToro research indicates. But even a company like Pearson may be more defensive than it first seems. It sells educational products like textbooks and online courses. Even in a recession, many people continue to spend on education.
Should I buy recession shares?
However, just because a company may see robust customer demand in a recession, does that make it an attractive investment for me? After all, performance in past recessions is no guarantee of what may happen in future.
Demand is only one part of the equation. Inflation could add costs and threaten profits, exactly what we have seen lately at Unilever. A good investment also involves buying at the right price. But as defensive shares swing into fashion, more buyers could make them pricier. British American Tobacco shares are up 29% in the past year, while Imperial Brands has risen 23%. By contrast though, the Unilever share price has slid 2%.
But I would not buy these companies just because I think their business models make them recession shares. Instead, as with any shares I buy for my ISA, I am looking for a strong business model that can lay the foundations of future profits, combined with an attractive share price.
Preparing my Stocks and Shares ISA for a recession
I think the three shares I own could help provide some protection to my ISA during a recession. They each have pricing power, which can allow them to raise prices when inflation bites.
That does not mean they will go up in value though. Recession shares can go down as well as up. Tobacco demand may not fall much in a recession, but in the long term it continues to decline most years, which could be a risk to profits at British American and Imperial.
However, by owning a chunk of different companies with attractive business models for which I have paid a reasonable price, I hope to position my ISA for success. Meanwhile, these three recession shares offer me an average dividend yield of 6%.
