Fluctuations in economic markets are quite unpredictable. There are always good times followed by the bad ones and vice-a-versa. Bad times of economic markets, often termed as recession, constitute a crucial component of the economic cycle. While government departments monitoring the economy have their own complex system of understanding and defining a recession, in simple and technical terms recession can be better understood as 'the negative GDP growth for two consecutive quarters'. The major cause of the recession is decline in investment and spending. The reasons for it can be:
Consumers becoming over-indebted
Extremely high company valuations
Running out of available capital.
A black swan event like the ongoing Covid19 pandemic or a major corporate bankruptcy could also trigger an economic downturn.
Every few years the word 'recession' pops up on headlines. It's the period when fear takes control over greed. Economic downturn typically leads to lowering of profits for many major companies culminating into a stock market crash or occurrence of correction. As a result, most investors begin to panic and desperately try to salvage their capital in every possible way. But for a smart few, the falling stock market is like a blessing in disguise, a sea of opportunities. They look for ‘the silver lining”, for the best buying opportunities, making the
power of compounding even more powerful. They see this as a chance to invest in high-quality stocks which generally trade at a premium.
Most investors fail to see the fact that a crash in stocks is more of a universal effect of the general economic downturn and the stocks of better-managed companies with good financial health would be the first to recover when the market sees an upturn, as they gain market share during recessions while their highly leveraged, cash strapped competitors struggle and lose theirs.
Every recession has enabled the markets to bounce back harder and scale new highs. The great recession of 2008 seemed like the end of the world for many investors. But few saw the opportunity, resulting in soaring ROIs ahead during the ten-year bull market.
All said and done, no investment of any size or type, at any point of time can be treated as 100% risk-free; and for obvious reasons, investors need to act very cautiously and remain vigilant in monitoring the market landscape to reap the best of the results. Investing during a recession, therefore, can be stressful without a plan. But, it could be a lot easier and even profitable with a well-diversified portfolio and a few tactical changes. Objective-based investments work wonders. Properly planned investments with a well-defined objective of beating inflation while generating decent returns make it possible to mitigate the risk and target higher ROIs to a great extent.
In a bull market, an overvalued stock can appear cheap, and an undervalued stock can look pricey in a falling market. This is a reasonable understanding that an investor should have. If one is scared of volatility, investing in risk-averse, interest-bearing bonds or debt funds is a good option.
The key to success is looking for long term opportunities during a financial crisis. Markets have braced several recessions, and each time they have emerged stronger. In times of volatility, it’s better to take a break from the news world. Instead one should focus on their goals.
During a recession, investing in these options is a good idea:
1.) Well-managed companies with low debt, good cash flow, and strong balance sheets:
Companies with strong financial health are less vulnerable to tightening credit conditions and have an easier time managing their debt in comparison to highly leveraged companies which are more vulnerable during a recession.
2.) Counter-cyclical stocks:
The Counter-cyclical stocks are recession-resistant and generally move in the opposite direction of the prevailing economic trend. Non-Cyclical stocks do well during recessions in comparison to cyclical stocks which often directly relate to employment and consumer confidence and tend to move in the same direction as the underlying economy. Industries considered counter-cyclical and recession-resistant are utilities, consumer staples, and discount retailers.
3.) Non-speculative Stocks:
Non-speculative stocks are generally considered a safe investment which tends to trade at lower price-earnings ratios, and often pays dividends to shareholders. It makes good sense to invest in non-speculative stocks during a recession as they are made up of more established companies having stable earnings and are less volatile than speculative stocks, which are often fuelled by market bubbles formed during an economic boom and go bust when the bubbles pop. Some of the non-speculative stocks are health services, defense and pharmaceuticals.
And for investors who want to play safest, investing in mutual funds, precious metals like gold and silver or real estate can also be some smart options as they mitigate the risks of volatility of the bad times to the maximum.
Investing in Mutual Funds:
A good choice for investors with long investment horizon (at least 5 to 6 years). As the markets hit low, the Net Asset Value (NAV) of funds decline, enabling investors to buy more units at a lower price. And when markets improve, the investments reap better returns for investors as they possess more units.
Hybrid funds like multi-asset funds offer investors higher diversification opportunities. Reason being they invest in multiple asset classes like debt, equity and gold. Investment in debt and gold can act as a cushion during a downturn, thereby bringing modest returns on the investments.
Diversification is a key factor to ensure safety during bad times in the economy. According to experts, a portfolio exposure comprising 10-15% of gold can cushion the investor from the slowdown in the economy.
Investing in Gold and Silver:
Gold and silver are both excellent assets to have during a recession because they don’t lose value based on the stock market. However, because these types of commodities do well when the market is down, prices usually go up. While gold and silver won’t lose value during a recession, it may be hard to buy a bunch if prices are high.
Investing in Real Estate:
Like gold and silver, real estate is also a physical asset and investing in them during a recession can be a smart move, since one can avail the benefits of low prices and interest rates.
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