The impact of a recession can be quite severe, as it may impact the employment and earnings of people. Investors must proactively prepare for this rocky ride. During a recession, investors should try their best to act in a cautious manner, and stay vigilant in regard to monitoring the market for opportunities to buy high-quality assets at discounted prices. Wealth advisers like Kavan Choksi mention that even though recessions can be difficult for investors, they might also coincide with the best opportunities. During these times, the market provides many prospects of growing wealth to people who have a long-term investment view
Kavan Choksi discusses the approach to follow while investing during a recession
The worst-performing assets in a recessionary environment ideally are highly leveraged, speculative, and cynical. Businesses that fall into any of these categories might be too risky for investors owing to the chances of them going bankrupt. On the other hand, to survive and thrive during a recession, investors should consider putting their money in companies that have low debt, strong balance sheets, good cash flow and belong to industries that do well during tough economic times historically.
It can be tempting for many investors to simply ride out a recession with no exposure to stocks. But by doing so they may miss out on major lucrative opportunities. After all, there are companies that tend to do well during economic downturns. Creating a well-rounded strategy based on countercyclical stocks that have strong balance sheets in recession-resistant industries would be a prudent decision for investors.
Kavan Choksi underlines that during a recession, investors should try to find companies that can maintain steady business models and/or strong balance sheets even with the economic headwinds. Examples of investments of such types include basic consumer goods conglomerates, utilities, and defense stocks. Experienced investors commonly add exposure to these groups in their portfolios when anticipating weakening economic conditions. Investors can study the financial reports of various companies to figure out whether they have healthy cash flows, low debt, and are generating a profit, in order to make a smart investment decision.
Even though it might seem surprising to newbie investors, there are certain industries that actually perform pretty well during recessions. Investors planning to formulate an investment strategy during economic downturns should ideally add stocks from such industries to their portfolios. Countercyclical stocks are known to especially well during recessions as their demand generally goes up when incomes fall or in situations where economic uncertainty prevails. Basically, the prices of countercyclical stocks mostly move in the direction opposite to that of the prevailing economic trend. As a result, during a recession, such stocks increase in value, making them a good investment too. These outperformers usually include businesses in industries like alcohol manufacturers, cosmetics, consumer staples, grocery stores, discount stores, and even funeral services.
As the economy gradually moves from recession to recovery, investors must also adjust their strategies as per its accordance. This recovery environment is mostly characterized by low interest rates and rising growth and the cyclical and speculative companies would be the ones to bounce back as the situation normalizes.
