UK stocks have seen a significant upturn since Rishi Sunak came into office. But challenges remain. Analysts across the board are predicting a recession in the UK, and that’s not good news for stocks. The thing is, investors are always trying to gauge what the market will look like in six-12 months time. So some of this forecast negative pressure is already priced in.
But with forecasts worsening, I’ve recently bought more shares in defensive stocks Haleon (LSE:HLN) and Unilever (LSE:ULVR). Here’s why.
Haleon
Haleon is trading around 13% below its listing price in the summer. In fact, its market value is roughly half of what Unilever had offered to buy it for earlier in the year. One of the reasons for the dip is a legal case brought against GSK — from which it had split in the summer. However, Haleon insists the case will not impact it.
But, importantly, Haleon has defensive qualities. And this means the stock tends to outperform when times are tough. Haleon owns brands such as Sensodyne, Advil, and Voltaren, all of which are household names.
This is important because evidence suggests that customers continue to buy branded products even when finances are squeezed. And that gives Haleon pricing power and the capacity to pass on costs to consumers. However it’s definitely worth noting that a deep recession naturally won’t be good for any customer-facing businesses.
Despite the challenge environment, the firm has performed well so far this year. It saw operating profits grow more than 20% in the six months ended 30 June, driven by increased profits and margins. Haleon has kept its full-year guidance for organic revenue growth at 6-8%.
It’s not cheap, with a price-to-earnings (P/E) ratio around 17. But that also reflects the strength of the company’s long-term growth prospects.
Unilever
Unilever is among the best-known defensive stocks on the FTSE 100. The multinational owns many household brands such as Hellmann’s, Marmite, Heinz, Persil, and Lifebuoy (the latter soap brand only appears to be sold in developing nations).
Like Haleon, it doesn’t come cheap right now. Investors have been hunting defensive stocks, but the consumer goods giant also has considerable growth potential. As such, Unilever trades with a P/E ratio of 17.5.
Its defensive qualities have already been demonstrated this year. In the third quarter, it hiked prices by 12.5%, but only saw volumes declining 1.6%. As such, underlying sales growth accelerated to 10.6% in Q3 while turnover increased 17.8%, including a currency impact of 8.8%.
Unilever is one of several UK stocks to have benefitted from the weakness of the pound. The firm sells in 190 countries and around 17% of its revenue comes from the US, leading to inflated GBP revenues.
However, one thing that concerns me, and other investors, is the company’s emphasis on ‘doing good’. It’s great to see a multinational using its reputation for good use, but investors, including Terry Smith, the CEO of Fundsmith, claims its coming at the expense of a strong performance.
