Recession-proof UK defensive stocks

With even the BOE warning that a UK recession could happen, it's a small wonder many investors are looking to position their portfolio defensively in preparation for the worst.

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From an investing perspective, a recession almost necessarily means some short-term pain followed by longer term opportunities. However, there are some stocks that perform better when the economy doesn't- offering a way to at least minimize the pain - and perhaps offer some short term trading opportunities.

A common trait of good defensive stocks is that they operate in a market with "inelastic demand". That is, they sell a product or service that people either can't or won't stop buying even if their budgets are pinched. For example, medication, food, and national defense.

Inflation to recession

Conventional wisdom with regards to inflation is that it's like salt: some is necessary to keep the economy going, but too much and recession warnings start flashing. Now that Chancellor Sunak has offered financial support, the BOE's job of keeping prices in check has gotten a little harder. Although some worry about stagflation and others about a crash.

Some stocks to keep in mind

AB Foods vs Tesco: An investor's first thought is that people will keep buying groceries in a recession. But many supermarket chains offer more than just staple foods, which means that budget-oriented chains such as Primark are possibly better than mass market stores like Tesco. Another consideration is turning to the source, including firms that produce the food staples (British sugar).

AstraZeneca and GlaxoSmithKline: A lot has been made of the meteoric climb of Moderna, and the relative success of Pfizer due to the covid vaccines. But the pandemic is behind us, and even though AstraZeneca's bid to be the budget alternative for vaccines didn't turn out, it still has a large portfolio of a wide range of medications that people will need, regardless of recession or pandemic.

BT and Vodafone: Utilities tend to be stable even in times of recession. But with geopolitics pushing fuel prices, less traditional utilities like mobile phones become an alternative. While people might hold off on buying the latest handset, they still need a phone and an internet service to use it.

Can the FTSE hold up?

Bulls have firmed up the FTSE’s uptrend by pushing its price back above the 50-week average. The ~7200/7300 zone is one to watch with two trend lines crossing through it, one bearish and one bullish.  As long as we are above this zone, the FTSE could print record highs. Above the latter, the 8k is major resistance.

The stochastic divergence is a warning against further upside. In the short term, we could see one more leg upward before the weekly chart divergence plays out. The low of 6760 is  important support, which if broken could see price test 6515, the summer 2020 peak.

Key takeaways

With Sunak having announced financial support, managing inflation will become more difficult for the BOE but may alleviate some economic risk this year. Investors can look at defensive stocks with ‘inelastic’ demand to position their portfolio. Food, medication and national defense stocks could offer a way to recession-proof UK portfolios.