The National Institute of Economic and Social Research (NIESR) expects the UK economy to narrowly avoid a recession this year. The forecast GDP growth of 0.2% for 2023 would be welcomed if true, particularly by the stock market. This could allow much stronger growth next year as the economy recovers. On that basis, here are two UK shares that I think could make large gains in this scenario.
Benefitting from tailwinds
The first company on my watchlist is NatWest Group (LSE:NWG). The share price is up almost 17% over the past year, despite the woes of the UK economy. What impresses me even more is that the stock is up even from pre-pandemic crash levels, showing resilience. Yet at 296p, there’s still room to run higher for the banking group, especially during an economic recovery.
I feel the company could do well because it will have multiple tailwinds for profitability. The business has benefited over the past year thanks to interest rates rising. This is reflected in a larger net interest margin. In Q3 results, it sat at 2.99%, up 0.27% from the previous quarter. Based on the base rate currently being at 4%, I’d expect NatWest to continue to see the margin rise in 2023.
Yet as the UK economy recovers, the bank will also get the benefit of higher consumer spending. It will also make more money from loans, mortgages and debit card transactions.
When I look back to 2015 when the economy was doing well, the share price was above 400p. Yet the interest rate was at 0.5% back then! So when I combine both the economic benefit plus the higher base rate, I think the share price could take off in coming years.
A risk is that the economy nosedives from here. Given the reliance on the British consumer, it would have a negative impact on the bank.
A rebound in the property space
Another idea I like is the Target Healthcare REIT (LSE:THRL). Given that I’m focused on share price gains, it might seem odd to include a REIT whose aim is to generate income.
With a current dividend yield of 8.48%, the passive income is very appealing. Yet I also believe the share price could rally strongly from here. It’s down 25% over the past year, with the value of the property portfolio falling significantly. Further, the stock trades at a 21% discount to the latest reported net asset value of the properties. I feel this reflects that the stock is undervalued, with investors fleeing from property shares right now.
When the UK economy recovers, the property market should follow suit. In this way, the net asset value should rise. As investor sentiment turns positive again, I’d expect the discount to also disappear.
As a long-term investor, the fact that the REIT is geared around healthcare is an added benefit. Some might see it as a risk to be focused on this niche area of property. Yet the UK population is ageing, and this sector should see strong demand going forward.
I’m optimistic about both companies and am looking to invest in them shortly.
