Until recent weeks, the UK stock market had been on somewhat of a bull run. The FTSE 100 closed above 7,500 and traded above the benchmark figure for around a week.
So I might be forgiven in thinking that the market had recovered. But, in reality, the UK index has been pulled upwards by oil and mining stocks.
In fact, the FTSE 250, which is more reflective of the UK economy’s health, is down 19% over 12 months. By comparison, the FTSE 100 is up 5%.
But what’s next for the stock market? I’m anticipating some stocks to do rather well in the prevailing macroeconomic environment, characterised by higher interest rates and a weakening pound.
Banks
British banks could be well positioned to prosper as net interest margins (NIMs) — the difference between lending and savings rates — increase on the back of rising interest rates. These are tipped to hit 4% in 2023 as inflation moves well into double digits.
NatWest could be one of the bank’s best positioned to profit. In fact, it’s already seeing the impact of higher rates. In Q2, NIM rose 26 basis points to 2.72%. Pre-tax profits came in at £2.6bn for the six months to 30 June, £400m above analysts’ expectations.
The government has a 48% share in the lender which, in my opinion, is among the safest of UK banks. The forecast recession won’t be good for credit quality, but the interest rate rises will more than make up for it.
I already own NatWest shares, and I would buy more today.
Defensive stocks
When recessions are forecast, investors often look for defensive stocks. These are companies that can normally be relied on to provide consistent returns, even during an economic downturn. Typically, this means companies that people will continue to purchases products or services from, even when times get tough.
One stock that could do well is Unilever, the British multinational owner of brands such as Dove, Vaseline, Marmite, and Magnum ice cream. It lifted its prices by 9.8% in H1, but this only resulted in a 1.6% fall in sales volume.
A prolonged and deep recession won’t be good for sales, but it’s normally the case that branded products are still purchased by the public, even during an economic downturn. After all, I couldn’t tell you what the alternatives to Vaseline or Marmite are.
I hold Unilever shares already, but would be happy to add to my holding.
Multinationals
The pound is weak, and its forecast to get even weaker before it gets stronger. So companies making a sizeable proportion of their incomes abroad have been tipped to do well. And there are lots of them. In fact, more than half of FTSE 100 revenues come from overseas.
One of my top picks is Smith & Nephew. The stock is down 27% over the past year amid supply chain and inflation challenges. But things are picking up. The medical device firm sells its products in 100 countries worldwide and that should help inflate GBP earnings.
Nations around the world are also struggling to clear a backlog of patients, due to the pandemic. Inflation remains a challenge, but medical devices are a necessity, so it should be able to push prices up accordingly.
I own Smith & Nephew stock in my pension, but I would also increase my stake.
