UK shares: has avoiding a recession triggered a once-in-a-decade opportunity?
I think this could be a great time to buy UK shares. Recessions happen on average once every 10 years and are often accompanied by falling share prices, giving enterprising investors a chance to find bargains.
But what’s better than a recession? Avoiding one when everyone is expecting one and marking down share prices – which is why I see this as a real opportunity in UK stocks at the moment.
The two worst-performing FTSE 100 shares over the last 12 months have been Persimmon and Segro. That’s hardly surprising – both are highly cyclical businesses that look vulnerable in a recession.
Persimmon is a housebuilder. Demand for properties tends to contract in a recession, which is why the prospect of an economic downturn has been bad for the stock price.
Segro owns and leases industrial real estate. Lower economic activity might cause some of its tenants to struggle to pay their rents, while also weighing on the value of the company’s assets.
But despite rising interest rates and high inflation, a recession doesn’t seem to be imminent. In fact, the Office for National Statistics recently revised estimates about the UK’s output at the end of last year.
Economic activity in the third quarter of 2022 was upgraded from -0.2% to -0.1%. And the fourth quarter is now thought to have seen growth of 0.1%, rather than the flat performance previously reported.
That means a recession – defined as two consecutive quarters of negative economic activity – isn’t imminent. The earliest the UK could officially be in a recession is at the halfway point of this year.
More generally, things seem to have been going better in the UK than previously thought. In particular, the construction sector is estimated to have grown by around 1.3% at the end of last year.
So might of the pessimism around property stocks has been unwarranted? And if so, might this be a rare opportunity in shares that have been falling in anticipation of a recession?
Good news about the broader economy is generally good news for both Persimmon and Segro. But the question of whether or not these are now stocks to buy is a little more complicated.
I think there are still significant headwinds for both of these businesses. Even with a recession ruled out, there’s still high inflation and rising interest rates to deal with.
This looks like a particularly challenging combination for Persimmon. High inflation makes materials more expensive and rising interest rates dampen the property market, making it harder to pass on these costs.
The company also reduced its dividend by 75% at the start of the month. I’m therefore not expecting significant shareholder returns in the near future.
With Segro, things are a little different. The rental market for industrial properties is still fairly strong, despite the value of its assets falling.
There’s also an argument to be made that inflation might be beneficial for the company. Higher prices makes it more expensive for competitors to set up their own warehouses.
Overall, I think the recent news makes Segro look more attractive than Persimmon. I’m looking seriously at the recent declines as a chance to buy the stock for my portfolio.
The post UK shares: has avoiding a recession triggered a once-in-a-decade opportunity? appeared first on The Motley Fool UK.
Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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