By Lina Saigol
Economist Joseph Stiglitz famously warned that the only perfect hedge is a Japanese garden. As the U.K. economy sinks into recession, with almost one million jobs lost and hundreds of businesses at risk of collapse, many investors will be tempted to pile into so-called recession-proof stocks.
Russ Mould, investment analyst at AJ Bell, said that the 20.4% slump in the U.K’s gross domestic product in the second quarter has already been priced into markets, which explains the muted reaction to the grim news. The real test will be the speed of the economic recovery. If the coronavirus pandemic continues, markets could react negatively.
“Potentially ‘recession-proof’ stocks or funds are therefore more likely to come back into their own if the pandemic persists, the number of local lockdowns grow and growth disappoints or — worse — GDP keeps falling,” Mould said.
Here are Mould’s four picks for investors looking for recession-proof stocks:
Centamin /zigman2/quotes/210323628/delayed UK:CEY -3.04% the Egypt-based FTSE-250 gold miner, has just hiked its interim dividend by 50% to show what could happen if the precious metal keeps rising in price. As in the first half, a 9% increase in output turned into a 56% jump in sales and a 280% leap in net profits, thanks to higher gold prices.
“If the recession lingers or deepens, it seems very likely that governments will spend more, increasing their already substantial budget deficits, and central banks will swing into action with more quantitative easing and unorthodox monetary policies. If history is any guide this is prime territory for gold, given its perceived status as a haven and a store of value,” said Mould.
H & T
H & T /zigman2/quotes/202498616/delayed UK:HAT -1.85% is Britain’s largest pawnbroker and that operation represents roughly half of its revenues. The rest is represented by the retail operations: the sale of new and second-hand jewelry from shops and online, personal loans, as well as some gold purchasing, foreign exchange and check-cashing services.
Mould believed H & T could provide a potentially valuable service to those who do not have access to traditional high street or online banking facilities, and its business should prove resilient in the event of any prolonged economic downturn owing to the pandemic.
“A double-digit return on capital and strong cash conversion highlight the strengths of the business, where the pawnbroking shops are reopening after the lockdown, although an increase in loan impairments could be a risk to consider, in the event of a long, deep downturn, although H & T proactively helped customers during lockdown with interest holidays and payment deferrals,” said Mould.
The FTSE-250 constituent invests in, and works to commercialize, the intellectual property (IP) developed by British universities. The group’s portfolio is progressing well, as shown by the rising valuation of Oxford Nanopore and the sale of a stake in Ceres Power, and the economy will have little influence on many of the fledgling firms that IP Group /zigman2/quotes/202030978/delayed UK:IPO -3.73% is backing.
“Better still, the balance sheet is net cash and the shares trade at a 32% discount to net asset value, which is a good start when it comes to looking for downside protection,” said Mould.
However, he warned that IP Group won’t be suitable for all investors. “The company has no dividend and there are also clear capital risks associated with investments in young firms, as they may fail or require further investment and soak up more cash even if they make progress, while even successful investments can take a long time to realize their potential.”
A sound balance sheet is always a good start, as it provides downside protection, and Telecom /zigman2/quotes/200900447/delayed UK:TEP -1.14% has barely £50 million of net debt, including leases, £55 million in further borrowing available, and no debt to repay until 2023 at the earliest.
Mould said that takes the pressure off and the FTSE-250 multi-utility provider model seems robust and proven over the long term, as it seeks to provide good value to customers, and offers the convenience of a single bill across its energy, telecoms and insurance services.
“Demand should prove relatively resilient, even in the event of an economic downturn, although investors will want to keep an eye on possible bad debts, if a really deep recession hits the country and customers find it harder to pay their bills. A commitment to an annual dividend of 57p a share this year could also please income-seekers,” he added.