Right now, there’s an enormous amount of economic uncertainty and a lot of talk about a potential recession. As a result, the stock market is exhibiting high levels of volatility. Looking for portfolio protection? Here are three categories of UK stocks to consider.
Supermarket stocks
In a recession, supermarket stocks often outperform. It’s easy to see why – people still need to eat during economic weakness so these stocks are ‘defensive’ in nature.
Now, UK investors have a few options when it comes to supermarket shares. Publicly-listed companies include Tesco, Sainsbury’s, Marks & Spencer, and Ocado.
My preferred picks are Marks & Spencer and Tesco. The former has a more affluent customer base (that could be more insulated from economic weakness). Its shares are also in a strong uptrend.
Meanwhile, the latter has its legendary Clubcard scheme (and all the subsequent data on its customers). It also has a 4% dividend yield.
I think these two stocks are worth considering today. However, they’re not perfect – both are facing intense competition and higher costs due to recent National Insurance (NI) changes.
Consumer goods stocks
Another defensive area of the market is consumer goods (or consumer staples). These companies produce everyday essentials like detergents, soaps, deodorants, and toothpaste – which consumers tend to buy no matter what’s happening in the economy.
My preferred stock here at the moment is Unilever (LSE: ULVR). It operates in the areas of personal care, home care, foods, beauty and wellbeing, and it owns many well-known trusted brands (Domestos, Cif, Dove).
There are two things about Unilever that are worth highlighting right now. One is that the company has a new CEO in Fernando Fernandez. He was previously CFO of the company, and people say that he’s a very astute operator.
The other thing is that the company’s share price has just broken out of a six-month downtrend and started moving up again. This suggests that investors are seeing considerable appeal in the stock in the current environment.
This stock does have its risks. Higher costs, changing consumer tastes, and competition from new brands are some worth mentioning.
I think the shares are worth considering today, however. They currently trade on a price-to-earnings (P/E) ratio of 18 and offer a yield of around 3.3%.
Tobacco stocks
Finally, tobacco stocks could also potentially provide portfolio protection. Two options here are British American Tobacco and Imperial Brands.
Now, tobacco stocks are obviously not for everyone (I don’t own any myself). Typically, they are not regarded as ‘ethical’ investments.
They can be quite defensive, however. In a recession, smokers tend to keep smoking.
Meanwhile, these stocks tend to have chunky dividend yields (which is handy in a market downturn). At present, British American Tobacco and Imperial Brands sport yields of 7.8% and 5.5%, respectively.
Of course, in the long term, tobacco companies are facing plenty of challenges. Increased focus on healthy living and more government regulation are two major risks.
They could be worth considering for protection today, however. It’s worth noting that while a lot of shares have experienced this weakness this year, both of these stocks have moved higher.
