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The economic outlook for the UK may have turned negative this week, but that doesn’t stop me wanting to buy stocks. The only question is where to look for them.
Economic forecasters are now fairly convinced a recession is coming. But negative sentiment can make for better opportunities for investors.
Recession
Almost every business goes through ups and downs, but some are more prone to cyclicality than others. Generally these tend to be ones that offer more discretionary goods and services.
People are unlikely to brush their teeth less in an economic downturn. But companies that rely on brand power should still be wary of consumers trading down to cheaper alternatives.
By contrast, people don’t need to go on holiday in the way they need to brush their teeth. So the airline industry is likely to see a sharper decline as household budgets come under pressure.
That’s the conventional view, anyway. But I think there are consumer discretionary businesses that could hold up better in a recession than the market might be expecting.
I’m also looking to be greedy where others are fearful. That means looking at companies where a short-term downturn is likely to distract from good long-term prospects.
JD Wetherspoon
The pub sector is one that could well come under pressure in a recession. Eating and drinking out is the kind of thing that might get cut from household budgets if things get tight.
Nonetheless, J.D. Wetherspoon (LSE:JDW) is better-equipped to deal with this than most. The company’s low prices mean its customers stand to gain less by staying home.
This isn’t an accident – the firm has been investing heavily in its pubs in order to keep its prices lower than the competition. And I think this could really pay off in a 2024 recession.
After a strong performance in 2023, the stock is much less attractive than it was at the start of the year. That’s a risk for anyone buying at today’s prices.
In a recession, though, I’d expect the company to be more resilient than most are expecting. So I’ll be looking to take advantage of a potential buying opportunity.
Forterra
With London brick manufacturer Forterra (LSE:FORT), the situation is different – for one thing, the stock has been falling in 2023.
I don’t expect the company to surprise anyone by doing well in a recession. But I think a structural shortage of housing in the UK means its long-term prospects look good.
One risk investors will want to be aware of is inflation, especially in energy. This could push up costs and put pressure on margins, weighing on profitability.
Importantly, though, bricks are something of a commodity. As such, what matters most is the ability to manufacture and deliver them at a low cost.
Forterra’s recent investment in its new facility in Desford means it is strong in this area. Combine this with strong long-term demand and a temporary recession could be a buying opportunity.
