It’s looking likely that the UK economy may enter a recession if growth stays weak. The latest downbeat data showed the economy shrinking by 0.1% in the third quarter of 2023. And if consumer spending slows, this could hit the earnings of many FTSE 100 firms.
Recessions aren’t good for business
The standard definition of an economic recession is two consecutive quarters of negative growth, measured using GDP (gross domestic product). Hence, if the UK economy shrinks between October and December of this year, then we will have entered a technical recession.
GDP growth in the second quarter was zero, so the UK economy has recorded almost no growth this calendar year. Then again, given that Q3’s decline of 0.1% is very small, I don’t see this as a big deal. I’ll only worry if the economy contracts steeply during the coming quarters.
Then again, inflation is easing, so the Bank of England may start cutting its base rate next year. This would be a shot in the arm for businesses and households struggling with higher interest rates.
A share for tough times?
Interestingly, studies show that there’s very little correlation between UK GDP growth and stock-market returns. Even so, in a consumer-led recession, some companies will do better than others. Here’s one Footsie business I already own that I hope will cruise through future economic downturns.
I like Legal & General
Over the past year, shares in leading investment manager and insurer Legal & General Group (LSE: LGEN) have gone precisely nowhere. As I write, they stand at 250.1p, exactly where they were 12 months ago. However, they have risen by 7.3% over the last five years.
At the current share price, L&G is valued at under £15bn. To me, this is a modest price tag for one of Europe’s largest asset managers. If I could buy the entire business at this price, I’d seize the opportunity.
For the record, my wife and I bought into this firm in July 2022 at a price of 246.7p a share. Thus, we have a tiny paper profit of 1.4%. However, we bought L&G for its outstanding ability to funnel cash dividends to its owners.
At the current share price, this stock generates a market-thrashing cash yield of 7.9% a year. To me, that’s a healthy reward while I wait for L&G’s future success. And if financial markets do well in 2024-25, that should be good news for the group and its shareholders.
In addition, L&G has a strong balance sheet, with a solvency ratio of 230% and billions of pounds of spare capital to hand. Hence, it aims to lift its dividend payout by 5% a year.
Of course, I could be wrong. L&G’s profitability is largely driven by returns from capital markets. If stocks and bonds do poorly in 2024-25 — as they did in 2022 — then the group’s earnings could take a big hit. Also, its income might fall as investors increasingly favour low-cost passive funds.
Even so, I see this FTSE 100 stock as offering a great balance between security and growth, as well as capital gain and dividends. I’m not saying L&G is recession-proof, but I suspect it is recession-resistant!
