The Bank of England (BoE) released a financial stability report last month warning that markets could be headed for a downturn. Based on historically higher than average prices and a lack of risk awareness among investors, the bank said there was an increased risk of a correction.
Together FTSE 100 That may be true, as the market is excited after hitting new highs in May. So what’s the best way to handle this situation?
Do not panic
A correction is not a crash. The Bank of England expects a fall of around 10%, while a crash would be a fall of 20% or more. That would send the FTSE 100 back to where it was at the start of the year, similar to the 9.3% fall it experienced at the start of 2023.
For investors who missed out on the lows, this could be another opportunity. I don’t intend to panic sell UK shares any time soon. However, I might consider shifting some funds into defensive stocks for added safety. Defensive stocks typically perform better when times get tough because their services are essential regardless of market conditions.
Retail and pharmaceuticals are two sectors that tend to perform well in tough economic times because their products are always in high demand. That’s why I think investors should consider stocks like these: Tesco (LSE: TSCO) and AstraZeneca (LSE: AZN).
The UK’s largest grocer by market share
As of April, Tesco controlled 27.4% of the UK grocery market, a significant share and well ahead of the next largest retailer. Sainsbury’s15.7%. With so many customers, it goes without saying that the future prospects of the retail industry are bright.
Tesco has performed well in 2023 as many other stocks have fallen, proving the company’s defensibility. It is now up 54% since hitting a five-year low of 200 pence in late 2022. The company’s price-to-earnings (P/E) ratio is competitive at 12.1x and its debt-to-equity ratio (D/E) is within an acceptable range of 62%. Financially, therefore, the company looks good.
However, the company’s low earnings per share (EPS) growth rate of just 3.4% means the stock price is unlikely to grow significantly going forward. Fortunately, the company enjoys a 3.9% dividend yield, making it a promising value stock for income investors.
Biotechnology powerhouse
AstraZeneca is more growth-focused than Tesco, and while its dividend yield is much lower, it’s risen 91% over the past five years, delivering an annualized return of 13.8%. This isn’t just down to sales of the coronavirus vaccine, which has been going strong for the past five years as well.
In terms of risk, the company has a staggering debt load of £26.17 billion, which is barely covered by its own capital. In an industry as competitive as pharmaceuticals, it’s a delicate balance: if a lucrative patent expires or new regulations restrict sales, the debt could quickly eat into profits and send the share price plummeting.
Not surprisingly, the inflated share price, now at £120, has pushed the price-to-earnings ratio to 37.8, more than double the UK market average. In most cases, this should give potential shareholders something to think about. But earnings remain strong, growing at 23% per annum. Maybe a little too expensive, but I think the company is well placed to weather a market correction.
This article first appeared on The Motley Fool UK: Will the UK Stock Market Crash?
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Mark Hartley has investments in AstraZeneca and Tesco. Motley Fool UK recommends AstraZeneca, J Sainsbury and Tesco. Views expressed on companies mentioned in this article are those of the author and may differ from official recommendations we make in subscription services such as Share Advisor, Hidden Winners or Pro. At Motley Fool we believe considering a diverse range of insights makes us better investors.
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