The 2020 stock market crash has thrown up a bunch of winners as well as a long list of losers. Many stocks are trading on dirt-cheap valuations relative to pre-crash prices. But what are the best UK shares to buy in light of the current macroeconomic climate?
Best shares = defensive shares
In a time of economic uncertainty, defensive stocks are the go-to when it comes to reducing investment risk. Moreover, with many analysts predicting that the UK is heading for a recession, defensive shares are becoming sought after.
A defensive stock is one that provides consistent dividends and stable earnings regardless of the overall state of the stock market. In other words, the market could be in utter turmoil, but defensive stocks usually trade quite steadily.
For instance, take supermarket stocks such as Tesco and Sainsbury’s. These companies provide vital goods and services that are consumed in times of economic uncertainty as well as stability.
But in my opinion, FTSE 100 healthcare stocks are among the best UK defensive shares out there. After all, there will always be illnesses that need to be treated, whether we’re in a recession or not.
Being in the healthcare industry, the earnings, dividends and share prices of these two stocks should remain relatively stable throughout the crisis. Neither company will suffer a dry-up in demand on the same scale as many other FTSE 350 companies. And sad though it is, demand could actually increase.
Since mid-March, the share prices of both Hikma Pharmaceuticals and Smith & Nephew have increased substantially, by around 38% and 18% respectively.
On top of this, both companies boasted a strong financial performance in 2019, with Smith & Nephew reporting underlying revenue growth up by 4.4%. The company also increased its full-year dividend by 4%.
Things were much the same at Hikma where the full-year report detailed that revenue was up by 6.6% and operating profit rose from $371m to $493m.
Strong long-term investments
I don’t think of these defensive stocks simply as investments geared towards shielding against wider drops in the market. I believe the fundamentals of these companies are such that both are strong long-term investments.
As already outlined, both scored an impressive financial performance last year. What’s more, I’m confident they have the capacity to replicate something similar, if not better, this year. If so, I expect investors to profit from a post-crisis rise in share prices that could continue over the longterm.
Hikma’s manufacturing facilities in Germany, Italy and Portugal, which are responsible for supplying injectable products to the US, Middle East and a growing number of markets in Europe, have been a catalyst for growth. I expect this proven strategy to continue delivering sustainable growth over the long term, rewarding investors in the process.
Meanwhile, I think Smith & Nephew’s commitment to deliver an excellent customer experience, increase investment in innovation and further improve efficiency will continue to pay off and reward investors accordingly.
That said, it’s worth noting that shares in the two firms don’t comes cheap. Both companies’ P/E ratios sit at around 19. Though for me, that’s justified by the prospect of strong earnings growth over the coming years.
In my opinion, both are two of the best UK defensive shares to buy today.
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Matthew Dumigan has no position in any of the shares mentioned. The Motley Fool UK has recommended Hikma Pharmaceuticals. 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.