Recently, there’s been talk that a recession could be on the way. In the US, the yield curve just inverted, which has often happened before recessions in the past. Meanwhile, here in the UK, the Office for Budget Responsibility (OBR) just downgraded GDP growth for 2022 from 6% to 3.8%. If it wasn’t for the post-pandemic rebound in growth, we’d most likely already be in a recession, according to David Miles, Head of Macroeconomic Forecasting at the OBR.
While there’s no guarantee we will actually see an official recession (defined as a fall in GDP in two successive quarters), I think it’s worth preparing my investment portfolio for one anyway, as they can have a major impact on stock prices (well before they occur because the market is forward looking). With that in mind, here’s a look at some areas of the market I’m focusing on right now, and some I’m avoiding.
Stocks I’d buy for a recession
The first area of the market I’m focusing on to protect my portfolio against a recession is consumer staples. These are companies that provide everyday essential items such as food and drinks, cleaning products, and personal care products. These kinds of products tend to be relatively recession-proof.
One of my top picks in this area of the market is Unilever, which owns a wide range of well-known brands including Dove, Domestos, and Knorr. I also like Reckitt, which is focused on health and hygiene and owns a wide selection of trusted brands such as Nurofen, Strepsils, and Gaviscon. A third stock I like in this area of the market is alcoholic beverages company Diageo. In an economic downturn, people tend to continue drinking (they often drink more!).
Another area of the market I’m looking at is healthcare. Generally speaking, spending here tends to hold up quite well during economic downturns.
One of my top picks here right now is Smith & Nephew. It specialises in joint replacement systems. Pharmaceutical company Hikma, which develops and manufactures generic and branded medicines, is another company I like. I’d also consider Edwards Lifesciences. It’s a US-listed company that specialises in artificial heart valves. People are unlikely to delay heart surgery just because there’s a recession.
Of course, there’s no guarantee that any of these stocks will do well in a recession. However, in the past, the consumer staples and healthcare sectors have generally outperformed during periods of economic weakness.
Stocks I’d avoid before a recession
As for areas of the market I’m steering clear of right now, one is banking. It’s highly cyclical and tends to underperform during recessions because loan defaults rise. So I’m avoiding stocks like Lloyds, Barclays, and NatWest, even though they could potentially benefit from higher interest rates in the years ahead.
I’m also avoiding housebuilders such as Berkeley Group, Persimmon, and Taylor Wimpey. These companies are highly cyclical as well, and have often underperformed the market quite significantly in past recessions, despite the housing shortage in the UK.