Recession is coming. You will not hear that often from market commentators and when you do hear the word recession being banded around, we will probably be through the worst off it.
This may be because recessions are notoriously difficult to predict. We may be in one as you read this article – a technical recession of two quarters of negative growth that is.
This may be Brexit induced or the consequence of years of Conservative austerity. Nevertheless, the UK economic environment is looking less and less attractive.
Thankfully for advocates of Brexit, it is not only the UK that is suffering. It is difficult to find a bright spot in Europe while Trump’s US-Sino trade war is threatening economic stability in the world’s two largest economies.
A global recession is on the cards. We are well over due one, so it shouldn’t be surprise when it comes. However, the market reaction may take you by surprise and the impact it has on your portfolio will be the consequence of the action you take now.
We take a look at three shares we feel, while not entirely immune to a global recession, will fare better than most.
Plus 500 is a CFD and spread betting provider based in Israel and listed in London. A quick look at the chart will highlight the significant discount you can buy Plus 500 as compared to three months ago, however, the reason for inclusion in this article runs a lot deeper than a recent sell off.
The company saw its share price crash after the group released its preliminary 2018 results in February. On the face of it the results were strong. Revenue had increased 65% and EBITDA jumped 95% to $506m.
Despite these very respectable results, shares fell over 50% on the day of the release.
This can be attributed to the EU ESMA regulations on CFDs and Spread Betting which set out to increase margins and reduce the risk investors are exposed to through the products.
This led Plus 500 to include this statement in their release:
“Following our latest assessment of the impact of the ESMA regulatory measures, FY19 revenue is expected to be lower than current market expectations. This, combined with our intention to maintain our marketing spend, is likely to result in 2019 profit being materially lower than current market expectations”
In our view, a classic example of sell first, ask questions later.
Of course, ESMA regulations will impact CFD and Spread Betting companies. Their revenue will be lower. Their customer numbers may stagnate and commissions generated stall. But these regulations have been in place for some time and cover a large proportion of Plus 500’s 2018FY that ran to 31st December.
Therefore the impact of ESMA on 2019FY will not be dramatically different to 2018FY. It would be optimistic to assume revenue grows, however, given the recent sharp decline in Q1 revenues due to a reduction in crypto related trading revenue and particularly quiet markets.
In addition, and reason for inclusion in the selection of shares for a global recession, Plus 500 will naturally see higher revenue during any periods of recession induced volatility in financial markets.
We also see strength in the efficiency of the company and strong cash generation attributes. Plus 500 had the highest Return on Capital Employed of all but one company in the FTSE 350 of 201%. This compares to 35% of IG Group and 27.7% of CMC Markets.
The group paid out $321.9m in dividends in 2018 and it is hard to see them doing it again. Nevertheless, if they paid out a third of 2018’s dividends, a purchase at current prices would translate to a rough yield of 6%.