What does the UK recession mean for FTSE 100 stocks?

Following news that the UK economy fell into recession at the end of 2023, Charlie Carman considers what could be next for FTSE 100 shares.

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It’s official! Britain’s in recession. Following confirmation that UK GDP shrank in the last two quarters of 2023, many investors will be wondering what this means for FTSE 100 stocks.

The index’s initial reaction was fairly positive. On Thursday, the FTSE 100 closed nearly 0.4% higher as traders took the gloomy news in their stride. But what might the longer-term implications be?

Let’s explore.

Interest rates

One plausible reason the UK’s leading stocks showed resilience yesterday is the prospect of earlier interest rate cuts. Until now, policymakers have been firmly focused on bringing inflation down.

Falling interest rates tend to create a positive tailwind for shares as cash savings rates become less attractive and credit becomes cheaper.

Since the economy’s now in recession, speculation is growing that the Bank of England could reduce rates sooner than expected to spearhead some much-needed growth.

However, the central bank has an inflexible remit to maintain inflation at 2%. Currently, the rate’s still double that. Although earlier rate cuts may look like more likely today, if inflation remains stubborn, monetary policy could remain tight for a while yet.

Recession fallout

It’s important to note that the FTSE 100’s not as exposed to the UK economy as some investors may think. Around 80% of Footsie companies’ earnings are generated overseas.

This fact alone suggests many FTSE 100 shares may not suffer too much from a domestic recession. However, some firms in the index have a stronger UK focus than others.

For instance, many housebuilders, retailers, and some insurers derive the lion’s share of their revenues from domestic sources. Weak demand and sluggish growth prospects at home could be acutely felt in these sectors.

In addition, a recession may have wider-reaching consequences for all FTSE 100 shares. If GDP figures remain weak in 2024, this could have significant implications for fiscal policy and sterling’s performance in foreign exchange markets. These variables can have major consequences for all stocks in the index.

A FTSE 100 stock to consider

For investors who are particularly concerned about how to invest during a recession, defensive shares may be worth considering.

A good example is AstraZeneca (LSE:AZN), the Anglo-Swedish pharmaceutical giant.

Biotech and healthcare stocks are viewed as relatively recession-resistant investments because demand for their products remains fairly constant throughout all stages of the business cycle. AstraZeneca’s no exception.

The company has good revenue diversification across therapy areas and geographies, with relatively little reliance on the UK for its sales.

Market% of FY23 revenue
US42%
Emerging markets26%
Europe21%
Established RoW11%
Source: AstraZeneca

Despite a sharp fall in Covid-19 vaccine sales, the firm delivered a 6% revenue increase last year. Strong demand for its cancer medications bodes well for the future.

What’s more, AstraZeneca shares now trade at a forward price-to-earnings (P/E) ratio around 14.5. This multiple’s lower than it’s been for a while, which suggests today might potentially be a good opportunity to consider bagging cheap shares.

The company does face risks if its promising drugs pipeline fails to live up to expectations. Potential lawsuits or disappointing clinical trials can be major setbacks for pharma stocks.

Nonetheless, I think AstraZeneca is a solid FTSE 100 stock to consider while the UK’s in recession.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Charlie Carman has positions in AstraZeneca Plc. The Motley Fool UK has recommended AstraZeneca Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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