When the Bank of England raised interest rates in August, it warned the UK would fall into a recession later this year. Typically, a recession causes panic selling of shares, resulting in a stock market crash.
So I’m preparing to invest in companies whose share prices fall because of panic selling, and not because of their underlying performance.
My investment strategy is to target strong businesses and hold for the long term. I define this a minimum of five years, but I ideally aim for more.
So with a recession being forecasted by the Bank of England, I’m honing my plan for identifying stocks that might trade at a discounted price if a recession does hit.
What happened during the last recession?
The last UK recession occurred in the first half of 2020, following the declaration of a lockdown because of the Covid-19 pandemic. True to form, the UK stock market plummeted.
The FTSE 100 was trading at 7,403p on 21 February 2020, and 5,190p by 20 March 2020. This represents a 30% reduction in one month! That’s just the average, some stocks fell by a higher percentage than this.
The recovery back to “pre-Covid” levels took just under two years. On 7 January 2022, the FTSE 100 was trading at 7,485p.
Investing amidst all the uncertainty was scary at the time! But it proved to be great for opening a position on companies at a snip of the price they should have been trading at!
The risks
There is always a chance that companies don’t bounce back. Recessions are a time when businesses do restructure, revise their targets and can shrink. This can mean they lose their competitive advantage to rivals.
I try to mitigate this risk by targeting blue-chip companies that are established in the FTSE 100. These are organisations that have a history of innovating and re-inventing themselves.
How I’m targeting stocks for the next recession
I’ll be targeting stocks in ‘recession-resistant’ industries. Specifically, supermarkets, consumer staples and cosmetics. This is because I think people will continue to buy products these companies produce throughout a recession.
I’ll be avoiding companies who sell luxury goods or experiences, as when consumers have less disposable income, these are often the first things to be cut from their budget.
The stocks currently on my radar are Unilever and Sainsbury’s. These two companies hit all the markers I’m looking for in a long-term investment.
I’m also monitoring Britvic. It’s a FTSE 250 stock I’ve been looking to buy more shares in for some time.
I already have a position in each of these stocks. Adding to my current shareholding when they’re trading at a bargain price is certainly not an opportunity I’m looking to pass up!
Overall, I think a UK recession represents a great time to buy shares at discounted prices. However, it’s important to target the right companies.
I’m going to be monitoring the market closely. I will certainly buy more than I usually do after the stock market crashes!