What are the best stocks to buy for a looming UK recession?

Jon Smith reveals two of his top stocks to buy to protect himself based on the potential arrival of a UK recession later this year.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young Black man sat in front of laptop while wearing headphones

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I don’t want to add any more doom and gloom than is necessary for a cold and wet start to the year. Yet given the lacklustre start to 2024 for the stock market and the continued signs of a potential recession later this year, it does have me thinking. If I wanted to build a watchlist of the best stocks to buy to protect myself, what should I put on it?

Recession flags

Let’s consider why the UK could fall into a recession this year. The latest data from December showed that for Q3 2023, the economy contracted by 0.1%. In theory, if the data for Q4 turns out to be negative as well, we’re already in a recession. This is marked by two consecutive quarters of negative GDP economic growth.

Even if we escape it for the moment, I’m not observing any signs that growth has suddenly picked up. In fact, in a trading update for the holiday trading period from retailer JD Sports, it noted that “the peak trading season…was softerreflecting more cautious consumer spending”.

If consumers continue to cut back on spending, this should act to reduce GDP growth, potentially causing a recession later this year.

Everyday essentials

To start with, if the recession is likely to come from lower consumer spending, I want to avoid retailers and luxury brands. Rather, I want to focus on products and services sold that we all have to purchase.

A good example is Unilever (LSE:ULVR). The firm is home to well-known brands ranging from Colman’s mustard to Domestos bleach. It has 80 brands that are stocked in most supermarkets. The share price is down 9% over the past year.

Apart from being well-known, most of the products are also daily essentials. Sure, I might not want mustard with my dinner, but I’ll definitely need bleach to clean with. The price point and product use for Unilever’s items makes me believe that it’s a good defensive purchase ahead of a potential recession.

As a risk, Unilever announced recently that it’s looking to sell off some individual product lines going forward. This could reshape what the company looks like, potentially for the worse.

Keeping the lights on

Another sector going on my watchlist is utilities. For example, Centrica (LSE:CNA). The British electricity and gas provider is doing exceptionally well at the moment. Over the past year, the share price is up 64%.

In part thanks to rising energy prices, profitability over the past couple of years has increased significantly. In 2022 it was promoted from the FTSE 250 to the FTSE 100, where it currently sits.

The fact that the business has strong financials is definitely a positive ahead of any potential economic storm. It’ll help Centrica to weather it better than others that have weak balance sheets.

Yet the other factor is that even when times get tough, consumers and businesses will still pay their energy bills. This should help to keep revenue steady over this year and beyond. Of course, the risk of defaults and bad debts from clients if things do get really bad is a point to consider.

Both stocks are on my watchlist, and if things do start to look more uncertain I’ll consider buying both.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Unilever Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing For Beginners

Investing Articles

This latest FTSE 100 dip could be an unmissable opportunity to pick up cut-price stocks

The FTSE 100 has pulled back with the government’s policy choices creating some negative sentiment. But this gives us a…

Read more »

Investing For Beginners

Here’s what a landmark legal ruling could mean for the Lloyds share price

Jon Smith mulls over whether issues with historical motor finance commissions could spell trouble for the Lloyds share price into…

Read more »

Investing Articles

£10 a day invested in UK shares could one day create a second income of over £3,000 a month!

Mark David Hartley outlines a strategy he’d use to aim for a second income that gets bigger over time, by…

Read more »

Investing Articles

£20,000 in savings? Here’s how I’d aim to turn that into passive income of £903 a month

Our writer shares one approach to passive income investing, spotlighting a quality FTSE 100 stock he recently added to his…

Read more »

Investing Articles

Should I sell my FTSE All-Share index fund and buy a S&P 500 tracker instead?

Harvey Jones is wondering whether now is a good time to invest more money in the S&P 500, after a…

Read more »

Investing For Beginners

2 UK shares that insiders have been buying this month

Jon Smith reviews two purchases of UK shares by directors that caught his eye over the past week and explains…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing For Beginners

If I’d invested £5k in a FTSE tracker fund after the pandemic crash, here’s what I’d have now

Jon Smith explains the extent of his potential gains if he'd invested in a FTSE tracker fund during the Covid…

Read more »

Investing For Beginners

3 ways I’m trying to future-proof my Stocks and Shares ISA for 2025 right now

Jon Smith runs through different measures including targeting dividend shares to help his Stocks and Shares ISA for next year.

Read more »