The best 20 shares and funds to buy in a recession

Evening Standard business editor Jim Armitage and three professional City investors choose their picks for where to invest as Britain officially sinks into recession

As the UK plunges into recession , it’s worth reconsidering which shares and funds to invest money in as a safe haven.

The kneejerk reaction is to go for defensive stocks – the likes of GlaxoSmithKline and British American Tobacco whose customers need their products no matter what the economic weather.

But this time around, the recession is different and promises to attack some sectors and companies far harder than others.

Travel and tourism, obviously, will be hit harder than any until a decent vaccine comes along, but certain technology stocks such as Just Eat Takeaway have benefited from the lockdown trend.

Shares like this are far from being defensive given their high-risk, high investment status as growth companies, but if the recession does not widen out into a cross-sector unemployment and spending shock, they could prove resilient.

Arguing against that is the ever present concern about dividends.

Just Eat Takeaway may give you the chance of decent share price growth, but it won’t pay you any income. It’s a longer term prayer for growth in a fast growing, young sector with a major division in Just Eat that has been underinvested in the past.

Dividends, no longer a dirty word as companies emerge from the worst depths of Covid, are highly sought after in these days of low returns on practically every investment on the planet. M&G, which announced it was paying its dividend today, is currently yielding 10%. Legal & General, an old favourite stock of mine, paid out this week, too.

So there are my ideas:

M&G
L&G
Just Eat Takeaway
But enough of me. We asked three professional investors for their tips on what you should be buying.

FUNDS

Emma Wall, head of investment analysis, Hargreaves Lansdown:

Troy Trojan fund
Pyrford Total Return fund
“Not all recessions are created equal, and how investments fare through a recession differs dependent on both the cause of the recession, and the government and central bank reaction to the downturn.

This time around we have seen governments not afraid to act fast to prop up individuals and institutions, and in the UK we can expect with reasonable certainty to see more spending from both Rishi Sunak and the Bank of England before the year is out.

If it works, quantitative easing tends to be good for equities, and bad for bond yields, but in the event the stimulus it is ineffective and the outlook really is poor then equities will suffer too.

A good way to hedge your bets is to invest in a fund which has the freedom to allocate to different asset classes, including defensive assets such as gold.

Troy Trojan and Pyrford Total Return both focus on capital preservation and are cautious in their stance – a good philosophy to have for the near to medium term.”

AJ Bell

Russ Mould, investment director:

Troy Personal Assets investment trust
Janus Henderson UK Absolute Return
Evenlode Global Income
The £1.29 billion Personal Assets investment trust, run by Troy’s Sebastian Lyon invests in a range of assets including high-quality companies, short-dated government bonds, cash and gold. It currently has about a 9% of the portfolio in cash, 28% in index-linked bonds and 12% in gold, meaning it is positioned defensively. Mr Lyon focuses on avoiding loss of capital, as well as giving an instantly diversified portfolio in just one holding.

“Another option is Janus Henderson UK Absolute Return. This £1.4bn fund has held up well in recent market volatility and protected against losses – since the start of the year it has gained 2% when markets have generally fallen. The fund aims to deliver a return above zero, typically over a 12-month period, and has managed to do so every year for the past 10 years. Managers Ben Wallace and Luke Newman have the ability to have a significant amount in cash, to protect against stock market falls, and to ‘short’ stocks to help when markets are falling.

“For those who want to remain in equity markets, Evenlode Global Income could also work. The fund invests in around 40 large companies around the globe, offering some diversification between different countries and markets. The fund managers hunt out holdings that have low levels of debt, high profits and require less capital to operate than their competitors, meaning they should be better placed to survive a downturn. While 37.7% of the £600m fund is invested in US firms and another 20% in UK companies, there’s a spread across smaller European and Asian markets too.”

LARGE COMPANY SHARES

AJ Bell’s Russ Mould:

BAE Systems
Centamin
H&T
SSE
Telecom Plus
“Investors need to be a bit wary of piling into so-called recession-proof stocks for two reasons.

“First, as the economist Joseph Stiglitz once noted: “The only perfect hedge is in a Japanese garden.” Something can still go wrong at a company even if its business is, in theory, fairly insensitive to the cycle.

“Second, investors priced in a recession during the market collapse of February and March and the Q2 GDP number was no surprise to anyone. The debate has moved on to the shape and pace of the recovery, so ‘recession proof’ stocks are 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. Even then, fiscal stimulus from Government, or monetary stimulus from the Bank of England could give stocks a boost, in the view such efforts will boost growth, but a balanced portfolio could always do with some ballast, just in case.

BAE Systems

The defence giant has just announced its return to the dividend list and as governments look to spend their way out of economic trouble this is one industry that should continue to draw consistent demand, especially as the geopolitical temperature seems to be rising across many parts of the world.

Centamin

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 also a store of value. 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.

H&T

The company is the UK’s largest pawnbroker and that operation represents roughly half of revenues. The rest of the business is represented by the retail operations, selling new and second-hand jewellery from physical stores and online, plus personal loans, as well as some gold purchasing, foreign exchange and cheque cashing services. H&T 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.

SSE

Utilities can often be a port in an economic storm, thanks to their relatively stable business flows and the income they offer at what remains a period of considerable economic uncertainty, and FTSE 100 member SSE could be a good example. The company has sold its volatile retail energy supply business and is in the vanguard of power generation from renewable sources. The firm is also committed to five-year dividend payment plan that runs to 2023, whereby it will increase dividend distribution at a rate that at least keeps pace with rate of retail price index (RPI) inflation for each year.

Telecom Plus

A sound balance sheet is always a good start as it provides downside protection and Telecom Plus 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. 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 also 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. A commitment to an annual dividend of 57p a share this year could also please income-seekers.

SMALL COMPANY SHARES

Andrew Monk, chief executive, VSA Capital and stock broker to smaller companies

Pressure Technologies
Lamprell
Pensana Rare Earths
Invinity Energy Systems
Ferro Alloys Resources
IP Group
Frontier IP
Recessions aren’t all bad, you just have to stay clear of certain sectors and be active in ones that will either be recession proof or will lead us out of a recession – so stay clear of consumer, leisure and banking sectors at the moment.

Governments globally are trying to promote transitional energy as a way out of the recession and there are plenty of plays in the smaller company field that could come good in that field.

Hydrogen stocks have moved up already but with some lateral thinking you alight on Pressure Technologies. You can’t have a hydrogen economy without storing the Hydrogen in specialist cylinders and they are a world leader at making them.

Transitional energy includes wind and solar. Offshore wind currently is growing very rapidly so we like Lamprell, which used to build oil rigs but is now rapidly transforming to building offshore wind farm components.

On wind farms you need very powerful magnets which use Rare Earths to boost their capability. Pensana Rare Earths will be in production in Jan 2021 and is a good magnet play.

Metals-wise, gold has already surged as a recession safe haven so it is probably too late to find bargains there, but I like vanadium as I believe that vanadium batteries built by people like Invinity Energy Systems will grow significantly. The world’s best vanadium asset, although still to go into production, is in my view Ferro Alloys Resources.

Tech and Biotech are always good growth areas. Picking individual companies can be tricky so buy one with a portfolio approach like IP Group or the smaller Frontier IP.