I’ve been making some changes to my portfolio with economic forecasts in mind, and these two FTSE 100 stocks are core to those changes. One thing I’m certainly not doing is saving. These dividend-paying stocks offer me better returns than any UK savings account, despite the safety of the latter.
Right now, I’m looking at banks and defensive stocks. And there are several reasons for this. Banks, which are normally reflections on the health of the economy, are poised to surge, in my opinion, on the back of higher interest rates.
Meanwhile, defensive stocks are companies that are likely to see continuous demand, regardless of economic conditions. This often means companies operating in areas like water and utilities, but also branded goods.
So let’s take a look at two stocks I’m buying ahead of what I predict to be a lively autumn for markets, and why.
NatWest
I’m buying British banks because interest rates are rising, and so are net interest margins (NIMs). In fact, interest rates are the highest they have been since 2008. And there’s a chance we could even surpass 2008 levels, according to some analysts.
Near-zero interest rates haven’t been good for banks. But we’re now seeing interest income surge.
NatWest (LSE:NWG) is among my top UK banks. After a stellar Q2, the bank now expects full-year revenues to rise by roughly 25% year on year, to approximately £12.5bn. That’s 6% above consensus expectations.
The growing revenues have been a result of increasing interest margins. Q2 revenues actually exceeded consensus estimates by 8%.
Revenue is likely to increase further in the coming months with the Bank of England (BoE) expected to push interest rates up further. NatWest, like its peers, will even earn more interest on the money it leaves with the BoE.
I appreciate that credit quality will likely fall with a recession forecast, but I believe higher margins will more than make up for it.
The bank has a dividend yield of 4.5%.
Unilever
Unilever (LSE:ULVR) is a blue-chip fast-moving consumer goods company based in the UK. With recession forecasts, I might be forgiven for thinking this isn’t the best stock to buy right now.
But the strength of Unilever lies in the brands it owns and its international reach. It owns many household brands such as Hellmann’s, Marmite, Heinz, Persil, and Lifebuoy — the latter being a soap brand that only appears to be sold in developing nations.
In its recently released first-half results, the company demonstrated its pricing power. Unilever said it lifted its prices by 9.8% versus the same period of 2021, but only saw a 1.6% contraction in sales volume. As a result, revenue grew 8.1%.
The data highlights Unilever’s ability to pass on rising costs to its customers. It now expects to beat its previous forecast of sales growth between 4.5% and 6.5% for 2022.
And as the pound increasingly weakens, the firm, which sells in 190 countries, will also see its GBP income inflated.
Finally, I appreciate that a long and drawn-out recession won’t be good for consumption, regardless of the products in question, but Unilever is among those best placed to deal with it. That’s why I’m buying this stock. It’s also offering a 3.8% yield.