Despite the FTSE 100 flirting with record highs, the picture for the underlying UK economy looks grim. Inflation is till persistently high and further interest rate rises have been mooted by the UK’s central bank. It’s not the most conducive environment for business.
It has certainly reassured me about my current approach of selecting defensive stocks that can perform despite the broader economy. Defensive sectors like financial services and utilities performed well last year. I am backing them to perform well again in 2023 amid similar conditions.
Inflation-busting UK stocks
I consider financials and natural resource companies as good defensive plays. However, I think the profits of these UK stocks are under attack from politicians and regulators. A recent example is the UK Government’s Energy Profits Levy. This is in addition to the price cap for energy firms. Conversely, I am interested in stocks that can pass on price increases to customers more stealthily.
My view is that consumer specialist distributors are best placed to do this. They can naturally pass on rising prices with operational leverage. Consumer specialists Unilever plc (LSE:ULVR) and Diageo plc (LSE:DGE) are two UK stocks I think fit this bill.
Pros and cons
Let’s begin with Unilever. It was one of the FTSE 100’s steadiest performers in a volatile 2022. I attributed this to its startling pricing power. The company experienced a broad reduction in sales volume. However, the underlying business still posted higher sales due to being able to raise prices significantly. With this pricing superpower, I expect to see greater demand for the shares if overall business conditions persist. However, I must still be mindful that sales volumes can decrease even further if inflation remains stubbornly high.
Meanwhile, beverage-marker Diageo’s diverse product line works in its favour. The company’s sales, operating profit, and margin all grew last year. It increased its dividend as a result. For me it’s the definition of consistent performance come sleet or snow. However, my gripe is that I will be receiving stability rather than a total return from this UK stock. It’s certainly not a dividend stock. Furthermore, its net debt figure has started to creep up. Higher interest rates will only increase its borrowing costs.
Resilient profitability
Looking ahead, the Bank of England’s MPC committee has signalled potentially more rate rises to normalise stubbornly high inflation.
It’s crucial I have a well-balanced portfolio over what I think will be a prolonged period of high inflation. In this regard, I view FTSE 100 shares like Unilever and Diageo as UK stocks that can enhance my portfolio value going forward. Most importantly, this is regardless of whether inflation remains high or not.
For this reason, I’m keen to buy shares in either stock this year. I just need to be wary of portfolio transaction costs regarding my recent portfolio changes.
