The Advantage Of Recession Proof Investment

The great recession of 2009 affected a lot of investors and left many with lessons and precautions plans. During the recession, out of panic, many of the investors sold out their stock for a very low price all in a bid to escape the negative impact of the period on their investments. The truth remains that, should these investors had waited, they would have successfully scaled through the recession period and their stocks value bounce back afterward. 

After the last recession, a lot of investors had been keeping an eye on the market value. But after a decade of steady economic growth without experiencing a recession, there has been a lot of guesses that there might be a recession in the mid-year of 2020. This prediction has left a lot of investors in agitation. Many are wondering how to secure their investments to avoid facing the same situation they faced 11 years ago. However, managing investment is not by correctly predicting when the recession would occur. There are lots of things to keep in mind when trying to protect your investment. Before discussing these things, let us first understand what recession is and how it works?

A recession period is an extended period of economic decline and a basic economic fact. This means the economy of a nation cannot continue to grow, but there are also times when some factors would lead to a decline. Generally, the economist explains recession as two consecutive quarters of decline in a country's gross domestic product(GDP). While GDP is the overall calculation of all the goods and services produced by a country over a given period of time. The features attached to recession include weakening employment in the country, faltering confidence on the part of consumers and business, failing economic development and real income, and weakening production and sales. These few characteristics are not exactly the kind of situation that would lead to a higher price of stocks or the overall successful performance of stocks.

Since the recession is generally related to market value, it tends to heighten risk aversion on the part of investors. During the recession period, investors are looking for is a flight for safety, a means to escape the negative impact of the recession on stock value. However, on the bright side, recession provides a means to recover for all investors.

The Lessons To Learn During The Recession.

Recession is always followed by a time of recovery. This is the first major thing all investors should understand. No state would want to continue to experience recession as this leads to a general fall of the state's economy. When the recession period is over, it is followed by a strong rebound in stock value. All that is needed during the investment period is to wait for the period to be over and not to give in to panicky.

The second lesson all investors should take note of is that investors are not to just sit and wait for the period to be over. There are some strategies that can help to take advantage of the recession circumstance and make a portfolio rebound strongly and quickly.

How A Recession Investment Strategy Works

The major key to investing before and after the recession period is to focus on the big picture instead of trying to time your way in and out of various stock markets, market sectors and so on. Although there are historical facts backing the cyclical nature of some investment during the recession, the truth remains that timing the period of recession and how long it would stay is beyond the scope of the investor.

However, this is not to say that there are no ways investors could remain afloat during a recession. There are lots of strategies that can be employed to invest before, during and after the recession. These strategies are explained below.

Macroeconomics And Capital Market.

This is a very interesting strategy to employ during the recession period. As an investor or a potential investor, the first thing to consider during the recession is the macroeconomic aspect of the recession and the impact of this on capital markets. The most reoccurring thing about the recession is that once it hits, there is a decrease in business investment, consumers of goods and products reduce their consumption, and there is a general shift in the perception and thought of the public. People move from their previous optimistic state to a pessimistic one where they are generally uncertain about the future.

It is very understandable that during this period, as an investor, you are frightened about what becomes of your investment. This fear is heightened by the prospective value of return and how to scale back. The fear progresses into psychological factors that manifest themselves even in the broad capital market trend. 

Capital Market Recession Trend

In the equity market, due to the heightened risk of investment, investors end up demanding for higher potential rates of return for holding equities. However, what happens is that for the expected return to go higher, the current price would need to reduce. This is the result when investors sell off their riskier stocks and moves to a safer investment like government debt. This is the major reason there is often a fall in the equity market even before the recession as investors refocus their investment interest from equity to government debt.

Investing By Asset Class

From the explanation above, it can be deduced that equity has an uncanny ability to serve as an indicator of a brewing recession. This is obvious in the last recession of 2009. Before the recession, the market had already started a steep decline in mid-2008 before the recession happened in November 2009. However, there is always good news for investors even in a decline. The good news is that some relative outperformance can still be found in the equity market.

Stock Investing During A Recession

The safest place for stock invest during a recession period is high-quality companies with long business histories. This is because these kinds of companies can handle prolonged economic decline. A good example of such a company is one with a strong balance sheet and companies with steady cash flow and a little history of debt. These types of companies are far preferable than companies with weak cash flow and obvious operating leverage. Companies with a strong balance sheet would be able to handle recession well and would also be able to handle its operations irrespective of the recession and its impact.

In contrast to this, companies that have lots of debts would face more challenge especially in handling the cost of productions. Though a company's fiscal probity is very important and should be taken into due considerations, more research should be done to ensure such a company is not cutting costs in the wrong areas. In a MarketSense study of 101 household brands' performance during the 1989-1991 recession, the results show that increased as spending help the companies mentioned below to scale through the recession period. The ad helped the company raised its sales and keep productivity performance at a steady level. 

• Bud light beer
• Kraft salad dressing 
• Jif peanut butter
• Coors Light beer

• Taco Bell
• Pizza Hut

While some of the brands that do not really take their marketing serious and faced a huge drop in the sale includes:

• Hellman's
• Jell-O
• Doritos
• McDonald's
• Green Giant

From historical analysis so far, the best place to invest in the equity market is the consumer's staple. Consumer staple products are products that consumers tend to get irrespective of their financial condition or economic conditions. These products include beverages, food, things needed for feminism hygiene, alcohol, and household goods. No matter how bad the financial situation is, consumers would still need these products.

There Is Still A Need To Diversify

Having explained the type of equity market that can be invested in, there is still a need to diversify. This is because, during a recession period, one cannot actually get the number of companies that would be affected. Diversification across stocks, fixed asset, and commodity, in addition to equity, is advisable. This could help as a way to help contain risk involved with the recession, especially portfolio loss.

Fixed-Income Recession Strategy

Fixed income is no exception to the impact of the recession and the financial risk involved. Since there is a higher default rate in fixed incomes, investors tend to shy away from these investments than they will from government securities. Examples of fixed-income investments include mortgage-backed securities (MBS) and corporate bonds (especially high-yield bonds). 

As the economy continues to decline due to the impact of the recession, business is faced with poor revenue generation and little profit-making. Most times, if the situation is not properly contained, it could lead to bankruptcy.

However, as investors sell off their fixed income assets for a safer place like government securities, the price of the fixed asset reduce. In this situation, the yield on bonds increase, but due to the belief that government e securities like Treasury-Bonds are better, the price of bond increase and yield decrease.

Commodity Investing for Recessions

This is another crucial area to consider during investment during a recession. Commodities are products needed for growing economic inputs including natural resources. As economic output grows the need for commodities also grows, conversely as economic output reduces, the need for commodities also reduces. The mistake most investors often do whenever they sense recession coming is to sell off their commodity investment, thereby leading to a reduction in the price of the commodity. 

However, the truth is, commodities are a global business, as a result, a recession in the USA might not affect its price and profit like every other kind of investment limited to the United States.

Investing for the Recovery

This is the question that goes through investors' minds, what is the next move when a recession starts to wind up and the economy begins to recover? When this happens, the most important place to keep a watch on is the macroeconomic factors already explained above. Most times, one of the tools the government uses to manage the economic effect of recession is its easy monetary policy. This involves a reduced interest rate aim at increasing the supply of money and discourage people from saving, thereby encouraging spending. The goal of this is to increase cash flow in the country and recover financial activities again.

One big disadvantage of low-interest rates is an increased in the demand for higher-return investment. This is why most times, the equity market recovers faster than other investment platforms. Also, most best-performing stocks after recession employ the use of operating leverage as part of their current business activities. 

Although leverages often suffer during the recession, once the economy picked up again it starts working well thereby allowing firms with debts to pick up faster than firms without debt. Also, small-cap stocks and growth stocks tend to do well during economic recoveries. This is because at this period investors are confident that the market is becoming better hence they embrace the risk involved.

Risk and Yield Concerns

Also within the frame of fixed-income markets, increased demand for risk manifests itself in higher demand for credit risk. When this happens, mortgage-backed debts and corporate debts start becoming appealing. As a result, there is an overall increase in price and a decrease in yields. However, investors who had previously run to U.S. Treasuries tend to start pulling out thereby pulling prices down while pushing yields up.

This same logic applies to the reformed attitude of investors to commodities. 

Summary

During a recession, the best way to remain afloat as an investor is to focus on the long-term horizon and set aside capitals to launched in other investment platforms when recession winds up. While the actual time of recession cannot be accurately determined, instead of anticipating a recession, it is better to shift away from a risky investment.