Recession stocks are ones that are defensive in nature and tend to outperform the stock market during times of distress. This isn’t to say that they might soar during a downturn. But if the FTSE 100 fell by 20%, recession stocks might only fall by 10%. To be clear, we aren’t currently in a recession. Yet with some forecasting the UK to enter one at the end of the year, here are some stocks that I’ve got on my watchlist should things start to turn sour.
Looking for necessities
It’s tough to predict ahead of time what will cause a recession. However, as we stand I imagine it would be due to high commodity prices and high inflation. This cost of living squeeze could cause spending to dry up and GDP to tumble lower.
With that in mind, I want to avoid stocks that are reliant on consumer discretionary spending. In other words, I want to buy recession stocks that are consumer essentials. I think that Tesco and J Sainsbury are two good examples. These two supermarkets have a strong market share. Even if we do see a slump in the economy, people still need to buy milk and bread.
I also like these two firms as they have cheaper own brand options, for those really feeling the pinch. In comparison to some more high end options such as Ocado, I think Tesco and J Sainsbury should perform better based on having a wider consumer base.
Recession stocks from the utility sector
Aside from supermarkets, I can also find recession stocks from the utility space. National Grid and Severn Trent are two FTSE 100 names I like. National Grid focuses on electricity and gas provision. Severn Trent is a water company.
In both examples, the provision of these services is a necessity. Regardless of whether this is direct to consumer or more wholesale supply, I don’t think either business should be materially impacted by a potential recession. There might be some risk of consumers reducing usage of utilities. But fundamentally, demand for gas or water won’t be going away anytime soon.
The added benefit of utility stocks is that historically the sector has offered generous dividends. Severn Trent has a yield of 3.5%, with National Grid at 4.3%. These might not be the highest in the index, but certainly are an added benefit to me for income during a difficult period.
My long-term investment plan
I have all of the above recession stocks on my watchlist, ready to go if things turn sour. There are two key points that I need to remember. Firstly, if I do buy these stocks, it doesn’t mean I’ll sell my existing portfolio. Secondly, I won’t hold off investing in growth stocks now just because of the potential for a recession. Both of these points speak to my long-term time horizon for investing. History shows that recessions (and market slumps) don’t last forever, and that the trend for the market is ultimately higher!