While I’m hoping for a stock market recovery this autumn, I don’t think we will see stocks universally move in the same direction. So, let’s take a closer look at the markets and see what the economic forecast might mean for UK stocks.
The sitrep
The FTSE 100 is currently trading above 7,500. However, this doesn’t mean that the market has recovered already. Instead the market has been pulled upwards by oil and mining stocks.
In fact, we can see that the resource-heavy FTSE 100 up 7% over 12 months while the FTSE 250, which is more reflective of the UK economy’s health, is down 15%.
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But now, interest rates are at their highest in a decade to counter soaring inflation, while the UK is soon anticipated to enter a shallow, but prolonged, recession.
My forecast: uneven growth
When picking stocks, I, like many other investors, am normally trying to gauge how these companies will be doing in 6-12 months time, and further into the future. This is what’s influencing my decisions.
Downward pressure on resource stocks
Amid global recession fears, I’m not looking at oil and mining stocks as demand for resources is likely to drop off towards the end of the year. OPEC is already forecasting a supply glut in late 2022.
And while lithium is part of my long-term strategy, I’m staying away from it right now. Lithium carbonate prices around $70,000 per tonne are unlikely to be sustained. In fact, analysts suggest it will fall back towards $15,000 a tonne later this year.
Margins under pressure
There are also sectors which will likely feel the squeeze as gas prices go sky high. For example, farmers are currently paying much more for fertiliser because of gas prices, and this pushes up grain prices, and then chicken feed, and then the price of meat.
In my opinion, these are knock-on effects that we will see for some time to come. As a result, I’m avoiding companies that may struggle to pass on higher prices — such as Greggs and Restaurant Group.
New tailwinds for banks
Low interest rates have been a headwind for banks over the past decade. Now, higher interest rates are a tailwind. Banks, such as Lloyds and Barclays, haven’t been able to expand their operations because the net interest returns just haven’t been there. But things are changing and banks are the area in which I am most bullish. I appreciate recessions aren’t good for credit quality, but the forecast is only for a shallow recession and higher rates will more than make up for it.
Defensives
Stocks with defensive qualities tend to do well during a recession. Discretionary spending is likely to fall, but consumers will likely carry on buying branded goods during their weekly shops. This is what makes Unilever an attractive choice for me right now. It owns brands like Dove, Hellmann’s, Magnum, and Marmite. And this could make it a real winner over the next 12 months.
Multinationals
UK-listed stocks are bought and sold in GBP, and normally report their profits in GBP. So, as the pound get even weaker, I’m buying UK stocks that make money overseas as this will inflate the GBP earnings. Unilever sells in 190 countries, while drinks giant Diageo is another firm with huge international reach. I’d buy both now.
