Finding good stocks to buy is more challenging than usual right now as the global economy struggles and geopolitical tensions worsen. In this climate, investors in UK shares face the prospect of dismal capital gains and disappointing passive income.
Latest research on Monday from EY-Parthenon shows the scale of the pressures on UK plc.
Last year there were a whopping 294 profit warnings by British companies, the data shows. This means that a staggering 18.2% of all London Stock Exchange companies cut their earnings forecasts, above the 17.7% that was recorded at the peak of the global financial crisis of 2008.
Explaining the reasons for these profits alerts, EY-Parthenon says that:
- 26% were caused by delayed contracts or contract decisions
- 19% were due to increased costs
- 19% resulted from higher interest rates
More trouble in 2024?
The good news is that likely Bank of England rate cuts will help boost UK shares in 2024. However, the outlook remains highly difficult for many British companies.
Jo Robinson, a partner at EY-Parthenon, notes that while a fall in inflation and interest rates could boost companies, she adds that “many moving parts need to slot into place before we can be sure of an economic ‘soft landing’“.
Furthermore, Robinson comments that “we expect to see increasing disparity between businesses that are positioned to capitalise on still limited growth and those that are hampered by the impact of recent earnings pressures or their access to and the cost of capital“.
Safe havens
Buying large-cap companies doesn’t always protect investors from wider pressures in the global economy.
Indeed, a third of profit warnings in the fourth quarter came from companies with annual revenues of over £1bn. However, most businesses on the FTSE 100 and FTSE 250 are in a better place to navigate choppy waters.
Many are market leaders with loyal customer bases and strong brands. A large number have diverse operations across multiple sectors and territories, while others boast enormous economies of scale that smaller companies do not benefit from.
A FTSE 100 stock for tough times
Take Coca-Cola HBC (LSE:CCH), for example. Its heavyweight labels like Coke and Sprite remain in high demand even when consumers feel the pinch. It also sells its products in dozens of countries across Europe and also in parts of Africa, which in turn protects the bottom line from regional problems.
And like its North American cousin, The Coca-Cola Company, this £8.6bn market cap company is able to go about its business far more efficiently than its smaller market rivals.
Its highly mechanised manufacturing network helps keep costs down; it can purchase in bulk to reduce day-to-day expenditure; and it can also borrow at lower interest rates, to name just a few economies of scale that it benefits from.
These qualities meant that, while many UK shares were issuing profit warnings in 2023, Coca-Cola HBC was instead raising its earnings forecasts. In fact the FTSE 100 firm has made a habit of upgrading its estimates in recent times.
I think the soft drinks giant is one of the best stress-free stocks out there. And I plan to buy more of its shares when I next have cash to invest.
