Hopes for a soft economic landing are increasing. That essentially means that recessions won’t be as sharp and the knock-on effects for companies and investors will be more manageable.
But this isn’t guaranteed. An exact landing for the global economy is incredibly difficult to predict.
We think investors should always invest with the long term in mind – at least five years. That means selecting investments that can withstand economic shocks.
Here are three share ideas that could be better placed to cope with a harder landing.
This article isn’t personal advice. If you’re not sure an investment is right for you, seek advice. Investments and any income from them will rise and fall in value, so you could get back less than you invest. Past performance isn’t a guide to the future. Ratios shouldn’t be looked at on their own.
Investing in an individual company isn’t right for everyone because if that company fails, you could lose your whole investment. If you cannot afford this, investing in a single company might not be right for you. You should make sure you understand the companies you’re investing in and their specific risks. You should also make sure any shares you own are part of a diversified portfolio.
American Electric Power
No matter what happens, people still need power. That makes utility stocks worth considering when trying to limit risk in economic downturns.
American Electric Power (AEP) is an enormous utility, providing power to over five million Americans across the US. It owns and runs the biggest electricity transmission systems in the country – think physical pylons and cables.
It also generates some of the power that flows through those systems. This huge scale and integrated operating model helps boost efficiency, which keeps costs and customer prices down – this adds to its reliable revenue stream.
Offering an essential service underpins consistent earnings growth. Operating earnings are expected to grow 6-7% on an annual basis.
This in turn underpins the dividend, which is growing in-line with earnings growth – there’s a prospective yield of 4.4% on offer. Remember though, yields are variable and not a reliable indicator of future performance.
AEP’s also making tracks to simplify its business and slim the portfolio. We think this is the right move – more focused businesses are nimbler. There’s also a lot of work – and money – going into clean energy which is a strong growth area in our opinion.
Debt levels are a bit higher than we’d like. This isn’t overly unusual for capital intensive utilities, but it’s something to keep an eye on.
Utility stocks by their nature and regulatory oversight mean growth is unlikely to shoot the lights out. But being in the business of keeping the lights on is about as resilient as it gets – a strength we don’t think is fully reflected in the current valuation.
View the latest AEP share price and how to deal
Remember, before you can trade US shares, you need to complete and return a W-8BEN form.
BAE Systems
Military defence is a fact of life in today’s world and the so-called ‘threat’ environment has only been accelerated by the Russia-Ukraine war. Governments are very unlikely to ever pull the plug fully on maintaining their defence systems and physical kit, and that’s why we think BAE Systems offers some resilience.
This giant manufactures fighter jet fleets, top-of-the-range tanks, and pretty much every other vehicle you can picture in a warzone. It’s also making tracks to beef up its security and tech-based conflict solutions, which is a sensible move given the world of warfare is changing.
Governments are high-quality customers and contracts tend to be long term. That feeds into a very enviable asset – visibility over future revenue.
The current order book stands at £66.2bn. Risks and costs can change over the tenure of those contracts, which is leading to some question marks over profits while inflation is running so hot. That’s something to keep an eye on.
As is the eye-wateringly expensive acquisition of Ball Aerospace for $5.5bn. The deal looks like a good fit to us and displays BAE’s serious intent to build out its in-space capabilities and relationships within the US intelligence community. But a smooth integration and management of cash and debt will be important to monitor.
BAE offers reliable revenue which underpins a prospective yield of 3.0% – as ever though, no dividend is guaranteed.
We see defence as a more resilient option with long-term growth potential. However, the geopolitical climate can always affect valuations in the short term.
View the latest BAE Share Price and how to deal
Coca-Cola
There’s only a small handful of super-brands and Coca-Cola is one. Its phenomenal customer loyalty and product awareness has allowed it to steadily grow revenue and profits for decades.
Coke’s operating model is especially attractive. It’s not directly involved in the bottling and distribution of its famous drinks. These are parts of the chain that tend to be on the hook for higher costs and logistical headaches.
Being a separate entity helps Coca-Cola’s operating margins hover around the impressive 30% mark. It’s essentially a giant, highly successful syrup concentrate marketing and sales machine.
Such is the power of Coke’s brand, it doesn’t tend to be affected by recessions. If you fancy a Coke, you buy a Coke. Not many people walk into a pub and order a vodka cola.
Having said that, the group’s been pumping prices up in response to the wider tough economic environment, but we’re approaching the point at which consumers have had enough – volumes are flat.
The fact price increases have been successfully put through without sending volumes into reverse is a great accolade. But we’re keen to find out where the price ceiling is.
Coca-Cola is a consumer brand powerhouse with an excellent product and operating model. Investors are paying for that strength with a price-to-earnings ratio of 21. This shows the market’s optimism, but it also increases the pressure for Coke to perform.
View the latest Coca-Cola Share Price and how to deal
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Remember, before you can trade US shares, you need to complete and return a W-8BEN form.
Unless otherwise stated, estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates aren’t a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.
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