The grim outlook for the UK economy has weighed heavily on the FTSE 250 during the past year.
Unlike the internationally-focused FTSE 100, London’s second-tier share index — whose constituents broadly provide greater exposure to Britain — has trended lower over the past 12 months. It’s down 10% over the past year in fact.
How does the UK’s avoidance of a recession last year affect the battered index?
Recession averted!
To recap, official figures on Friday showed the British economy recorded zero growth in the final quarter of 2022. Had it shrunk as predicted then the country would have slumped into a technical recession. This is defined by two consecutive quarters of decline.
Still, this does little to improve the outlook for many FTSE 250 shares. Markets are forward looking and the UK economy faces major obstacles in the near term and beyond.
Ben Laidler, global markets strategist at eToro, commented that “any celebration will be short-lived. The economy remains below its pre-covid level and December growth fell sharply, down 0.5% versus November.” Last month’s decline was in fact larger than economists had been expecting.
Meanwhile, analyst Sophie Lund-Yates of Hargreaves Lansdown said that “while the absence of an official label will be seen as a victory, there’s an argument to say the can has simply been kicked further down the road.”
She added that conditions for consumers remain extremely tough, noting that “around 7m households are still expected to struggle to pay energy and food bills, technical recession or not.”
The City still expects the UK economy to move into technical recession later in 2023 amid high inflation and rising interest rates. The Bank of England for instance forecasts a recession that will last well into next year.
3 FTSE 250 shares for 2023
Investors need to tread carefully when choosing stocks of companies with high exposure to Britain. Earnings could disappoint and the size of the dividends many stocks pay out could fall short of forecast.s
That said, I don’t believe this makes the FTSE 250 a no-go zone for income seekers. There are still many shares I expect to pay big dividends in 2023.
Greencoat UK Wind is a UK share I’ll be looking to buy with spare cash to invest. Profits at the wind farm owner can suffer during calm conditions. But the essential nature of electricity production still, for the most part, makes them dependable profits generators.
Greencoat offers a healthy 5.3% forward dividend yield. And FTSE 250 real estate investment trust (REIT) Assura carries an even larger 6.1% one.
The steady stream of government-backed rents Assura receives allows it to pay big dividends during good times and bad. Indeed, this record has continued even as construction costs have recently risen.
I’d also look to buy 4.8%-yielding Tritax Big Box. A lack of decent acquisition targets could hit long-term earnings growth. But in the meantime, its blue-chip customer base (which includes Amazon, DHL and Tesco) should deliver reliable rental income.
