Are hopes of a V-shaped recovery too much of an ask? It was assumed by many that an easing of lockdown restrictions would cause UK GDP to explode. However, official data released yesterday has cast doubts over the probability of a sharp rebound in the domestic economy.
The Office for National Statistics said British GDP rose just 1.8% in May. City experts had been expecting a much meatier 5.5% improvement. Talk of a prolonged period of economic stagnation and then an eventual improvement (or a U-shaped recovery) has since accelerated.
Speculation of a choppy economic recovery comprising multiple recessions (W-shaped) has gained traction too.
Reasons to be cheerful
That’s not to say there still aren’t believers in a V-shaped recovery. Indeed, a key policymaker at the Bank of England put her head above the parapet on Wednesday to voice expectations of a V-shaped bounceback.
Silvana Tenreyro, a member of the bank’s rate-setting Monetary Policy Committee, said that “assuming [Covid-19] prevalence gradually falls, my central case forecast is for GDP to follow an interrupted or incomplete ‘V-shaped’ trajectory, with the first quarterly step-up in quarter three.”
Tenreyro also said that “we are seeing indications of a sharp recovery in purchases that were restricted only because of mandated business closures.”
But Tenreyno did add an important caveat: “This [recovery] will be interrupted by continued risk aversion and voluntary social distancing in some sectors, remaining restrictions on activities in others, and in general, by higher unemployment.”
Great ways to play the V-shaped recovery
The biggest economic shock for 300 years means the recovery could take a number of shapes. But let’s say that Tenreyno’s belief that a V-shaped recovery (however straight) is around the corner. What are some of the best UK shares to buy for such a scenario?
Well, shares which are particularly sensitive to the UK economy will see the sharpest improvement in trading conditions (and their share prices) as a V-shaped recovery takes hold. And I’d buy the housebuilders as economic conditions improve.
I bought Taylor Wimpey and Barratt Developments shares as they’re likely to benefit from the UK’s housing crunch for years to come. Lockdown measures as the pandemic took hold wreaked no little damage, but they now appear to be over the hump.
Demand for their newbuilds has picked up again as buyers are out and about again. A sharp improvement in economic conditions would turbocharge sales of their product too. The stamp duty holiday recently introduced on properties worth up to £500,000 will also give the builders a shot in the arm.
I’d also buy shares in certain retail stocks to ride a V-shaped recovery. I’d buy those that operate at lower price points like B&M European Value Retail, Card Factory, and Shoe Zone.
Shopper pursestrings would be loosened under this scenario. But consumer confidence following Covid-19 (and amid the threat of a no-deal Brexit) is likely to remain somewhat fragile.
I’d also buy e-commerce giants like ASOS and North American colossus Amazon as the internet shopping phenomenon gains traction.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Royston Wild owns shares of Barratt Developments and Taylor Wimpey. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended ASOS, B&M European Value, and Card Factory and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. 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.