A bad year for the stock market? On the contrary, the FTSE 100 has held firm, declining by just 1% this year in spite of the stock market volatility
Funnily enough, despite clear economic headwinds, I expect the main index to have outperformed again by the end of 2023.
So, before the market takes off, here are two high-quality defensive stocks I think can flourish in a recession-themed 2023. However, I must say this is somewhat dependent on the persistence of two key economic drivers today — high inflation and a relatively weak currency.
Repeat outperformance
My take is that the sharp depreciation of sterling against the euro and the US dollar has financially boosted companies with large overseas revenues more so than those with a domestic focus. FTSE 100 companies have certainly benefited from this trend.
Approximately 70% of the FTSE 100’s revenues are derived from overseas markets. Despite sterling’s recent strong performance, I think the risks for the pound are skewed to the downside for the foreseeable future because of the bleak economic situation in the UK.
FTSE 100 stock picks for 2023
One company that I think is sure to benefit is BAE Systems plc (LSE:BA). The share price has jumped by nearly 50% in 2022 as investors anticipate a greater level of defence spending due to the conflict in Ukraine.
I expect more demand for howitzer missile systems after its successful deployment by the Ukrainian army. Positively, the company has set out its intention to produce more — something I believe will play a huge part in its future revenue generation.
Secondly, the company makes most of its money in the US, where it has huge manufacturing plants. The strong US dollar has made it cheaper to import the key metals the company uses. Simultaneously, the robust dollar means that the firm benefits from foreign exchange trends.
So in the medium term, I foresee cheaper production costs and greater demand. The combination of these factors is bound to rub off on the company’s share price. City analysts have already forecast 20% upside to its valuation next year. I think it’s likely.
Additionally, I think the financials sector could be one of the FTSE 100’s outperformers next year. A higher rate environment is a silver lining for these big lenders’ bottom lines. Among them, Barclays appeals most to me. Its diversified business model means many of its lines are less exposed to the direction of the UK economy. It also ranks as the cheapest versus its top peers like Lloyds Bank and HSBC (on a price-to-earnings basis).
Of course, I face the risk of having some serious egg on my face if there is a huge reversal in inflation and the pound. But I think the odds of that happening are pretty slim.
Ray of light
I am well aware of the talk about the UK economy, recession, and slowing growth. But, I am also aware that many of the UK’s leading stocks aren’t solely dependent on the domestic market.
With a challenging macroeconomic picture waiting in 2023, quality stocks like Barclays and BAE Systems are shrewd stock picks for me. In my opinion, both companies have positive tailwinds to harness and this can boost share price growth over the coming year or two. I intend to purchase shares in both companies imminently.
