Last summer's credit market hiccup bought with it a chill economic wind. Indeed, while many City commentators are doing a heroic job of talking down the chances of a recession, it's hard not to worry that the mega-writedowns reported by international banks are going trickle through the system and show up as lower profits, or even losses, in the accounts of a wide range of companies.
In fact, the trickle down effect is already being experienced by many consumer-facing companies. Christmas was bleak for high-street retailers and housebuilders are seeing ever-reduced interest in their wares. Indeed, mortgage data for December - at a record low of 73,000 - suggests the UK's housing boom may finally have come to an end as prices edge south and mortgage payments bite. And, for riskier borrowers, credit of any kind is becoming increasingly hard to come by.
Yet what's scarier than events to date is what could happen as 2008 rumbles on. The job market is now showing the first signs of faltering. While the Office of National Statistics (ONS) reported bumper figures for the final quarter of 2007, forward-looking surveys, such as the Chartered Institute of Personnel and Development and KPMG's Labour Market Outlook, have reported a weakening in hiring intentions. In fact, consultancy Capital Economics predicts that unemployement could hit a 10-year high by the end of 2009.
What's more, it's questionable how aggressively the Bank of England will react to mounting economic problems due to the inflationary pressures created by rising commodity prices, such as oil. Data from the ONS put factory gate price rises at a 16-year high of 1 per cent in January, equivalent to an annual rate of 5.7 per cent. And, due to high levels of public sector debt, the government is also poorly placed to fend off economic problems through tax cuts or spending increases. So, investors need to be alive to the possibility that there could be some grim economic times ahead. And that means many businesses that have looked like fine growth plays over recent years could come unstuck as demand declines and the potential to fund acquisitive expansion with debt diminishes.
So where should investors look for growth now? There is, of course, the tried and tested strategy in hard times of seeking out classic defensive sectors, such as tobacco, utilities, and aerospace and defence. The only trouble with these stocks is that, on the whole, they are very boring. In addition, many such shares are looking rather dear as investors have already piled into them to take refuge. And if you’re paying up for somewhere to hole up during a storm then it is nice to get some decent growth thrown in.
The City has been keen to tout the growth prospects of companies with exposure to fast growing emerging economies that could see their performance "de-couple" from the lousy conditions in the US. However, as the state of the US economy has begun to look more dismal, this argument has lost traction. Indeed, it is hard to see how emerging economies can avoid a dose of pain if their biggest customer falters.
But don't give up. There are several industries that should have good growth prospects even in the jaws of a recession. In fact, some companies could actively benefit from a downturn, while others are growing fast in defensively positioned end markets. These defensive growth stocks are something every portfolio could surely do with in times of such uncertainty.
