The shares the pros are backing to weather a recession

There are certain qualities the pros look for to find companies relatively immune to the wider economic malaise.

It’s likely that the UK economy is already in a recession, which economists expect to last until the second half of 2023, or potentially even longer.

Generally, recessions are associated with lower stock market prices, resulting in higher levels of volatility than usual. This throws up plenty of challenges for investors, but during such times, while there will be plenty of businesses under the cosh, some firms will be relatively immune to the wider economic malaise.

• Explore our: Free regular investing | Top Investment Trusts  | Transferring an Investment Account

Below, we run through ‘recession-resistant’ shares highlighted by fund managers.

‘Weather-proof businesses’

James Thomson, fund manager of Rathbone Global Opportunities, holds between 15% and 25% in recession-resistant businesses. These are companies that are not as closely linked to the economic cycle, or those where demand is more predictable. 

In a video interview with interactive investor earlier this year, Thomson named US firm Waste Connections (NYSE:WCN) as an example of a weather-proof stock. He made the point that even in a recession cutting back on bin collections is not going to be top of the list. “Things have to get pretty bad for you to turn off that service,” he said.

Simon Edelsten, fund manager of Mid Wynd International Investment Trust (LSE:MWY), owns around 15% in companies he calls “cockroaches”, those that can survive disaster. He cited Japan’s biggest phone company, Nippon Telecom, as an example of a company that can “pass on inflation” and therefore cope when the economy slows.

• Watch our interview with James Thomson: three resilient growth shares the market underestimates 
• Watch our interview with Simon Edelsten: how to find 'cockroach' shares that can survive disasters 

Defensive companies that provide goods and services consumers view as essential are viewed by the pros as having plenty of qualities that enable them to perform well regardless of the prevailing economic backdrop. Companies that fall into the defensive camp include utilities (water, electricity, gas) and consumer staples, such as food.

Companies operating in the pet sector are often named by fund managers as recession-proof stocks on the grounds that consumers will not cut back spending in this area. One example, held by City of London (LSE:CTY) Investment Trust, is Nestle (SIX:NESN), which owns various dog and cat food brands.

Financial tech

In 2022 it has been a challenging period for growth-focused stocks, which have seen their future earnings devalued by high inflation levels and interest rate rises.

However, for certain “quality growth” stocks that are successfully harnessing technology to improve their products or services, a recession could be a more favourable market backdrop.

Financial technology companies is one area the pros are drawn to. James Knoedler, co-manager of the TB Evenlode Global Equity fund, cites Mastercard (NYSE:MA) and Experian (LSE:EXPN), saying that both companies are “competitively advantaged in a way that gives them pricing power, and enjoy recurring revenues”.

Knoedler adds that in the case of Mastercard a key attraction is that “its global payments network is critical for daily commercial activities which are non-deferrable”.

Giles Money, a global portfolio manager at Sarasin & Partners, also highlights Mastercard. He points out that it grew its revenues during the global financial crisis.

Money also picked out PayPal(NASDAQ:PYPL), which has more than 400 million users for its payment technology services. He adds: “E-commerce grew in the last consumer recession, so again the resiliency of these models might be misunderstood if compared to a more industrial company.

“With PayPal we welcome the recent activist engagement and the new chief financial officer, and think they have materially reduced the chance of further disappointment by instigating a large share buyback and cost-cutting programme leaving the shares trading at a material discount to our own fair value.”

• What is stagflation and how can investors protect portfolios? 
• Why bonds are back as a diversifier despite rate rises
• How the cost-of-living crisis is changing the way pros invest

Ken Wotton, fund manager of investment trust Strategic Equity Capital (LSE:SEC), agrees that companies investing in technology solutions with resilient financial profiles have the ability to “weather the current economic uncertainty”. He picked out UK smaller company Fintel (LSE:FNTL), which provides technology and data solutions to provide regulatory and business support to small and large financial advisers.

Wotton adds: “Digital transformation is a pervasive theme across many industries with investment in technology solutions being driven by the need to remain competitive, drive efficiency, reduce costs and improve customer experience among many other reasons.

“The financial sector is particularly active in this area as regulation, customer retention, automation of complex processes and the management and analysis of large volumes of data all drive demand for technology solutions.”

Anu Narula, head of equities at Mirabaud Asset Management, agrees that financial tech firms will remain resilient during a recession. He picked out Broadridge Financial Solutions (NYSE:BR), a US firm that each year processes voting for more than 600 billion shares at more than 12,000 investor meetings. It is held in the Mirabaud Sustainable Global High Dividend fund.

Narula says: “Broadridge’s functions are constantly needed by companies to meet regulatory requirements, which means its business is less susceptible to cyclical fluctuations. Broadridge has strong cash generation, high recurring revenues and continues to hold up well as the global economy slows.”

Cloud computing

Another key investment area that fund managers point to as being recession-proof is cloud computing. Speaking to interactive investor in June, George Crowdy, co-manager of the £3 billion Royal London Sustainable World Trust, explained why he is bullish on firms with a big presence in this area.

Crowdy said: “Amazon Web Services is the market leader but may face the biggest slowdown risk as it powers lots of start-ups, which could come under pressure as demand for high-risk technology stocks falters in the face of rising interest rates.

“Microsoft (NASDAQ:MSFT) will be safer as it focuses on running the computing infrastructure for large enterprises, which will be safer in an economic slowdown. The third player is Alphabet (NASDAQ:GOOGL), which does a bit of both, large and small companies. It is smaller, so high growth will be easier for it.”