The verdict is out. The UK’s economy is indeed in recession. The Office of National Statistics’ (ONS) latest numbers estimate that the economy contracted by a huge 20.4% in the April–June quarter. If the FTSE 100 investor in you just panicked, please allow me to present three arguments supporting why you should relax instead.
Why FTSE 100 investors needn’t worry
One, the GDP numbers refer to what has already happened. It’s already in the past. We are seeing the print of what was happening a six weeks ago. Two, if we really want some idea of what will happen in the future, I think the standalone numbers for June are the best ones to look at. I say this because that’s the only official economy-wide print showing business health as the lockdown was eased further. And it looks okay, with 8.7% growth from May.
Even in May, when the lockdown was lifted only partially, the economy had already grown by 1.8% according to the first estimates. Per the revised estimates, even the May growth is higher at 2.4%. The point here is that the UK economy has resumed growth, but that has not yet showed up in the quarterly numbers.
Three, the equity markets appear to have priced in the numbers already. The FTSE 100 index is up 1% as I write, compared to yesterday. To me this indicates that these GDP numbers are unlikely to drive another stock market crash. If FTSE 100 stocks do crash again, it will be for reasons like the uncontained resurgence of coronavirus or the going bust of a big company that foretells a crisis ahead (remember the fall of Lehman Brothers in September 2008?) or others, for that matter.
Stock investing ideas in the GDP print
What the GDP number does, however, show me is the sectors that have coped better than others. The bounceback in construction has been sharpest in June, with a growth of 23.5%. The sector had seen the sharpest contraction during the lockdown, but I think it’s still quite heartening that it has returned with vigour.
Based on this, I’d consider investing in FTSE 100 stocks of construction and real estate companies. Those with spread out geographical coverage would be particularly attractive right now. This is because some economies have fared better than others in the recession. As the ONS points out, the UK’s GDP fall has been double that of the US.
Keeping this in mind, I’d consider investing in the FTSE 100 stock CRH, whose share price has almost doubled since the dark days of March. I reckon its upcoming results later in August could show some weakness because of the abrupt recent stop to construction activity. But I don’t think that should deter the long-term investor from buying the stock with solid credentials, even in a recession. I’d buy it for my Stocks and Shares ISA to ensure tax-free dividends and capital gains, if I choose to cash in on them.
