Markets have fallen 18.25% from their all-time high, startups are laying off their employees, the price of crude oil is rising, and other factors have spooked investors and working professionals.
So, are we about to enter the 20% threshold of a bear market or recession? If yes, then where should you be investing during the recession.
The Story
If you follow global news and media you must have noticed that the US Federal Department has increased interest rates, startups are laying off their employees, and Y combinator is saying, “winter is coming”.
Well, it was a jolly old summer with almost 100+ unicorns, Venture capitalists going from “take my money” to “stay cautioned” we saw a great bull run.
Now, you must be wondering to know what went wrong, why “summers” changed to “winters”, and all-time high markets created new lows. It all started with the US Central Bank hiking the interest rate because of high inflation.
Inflation in the US surged by 8.5% on March 22’, the highest in the last 40 years. This is one of the main reasons that pushed the Fed to raise the interest rate from 0.75% to 1%. With the hike in the interest rate, borrowing got more expensive for companies.
During a recession, stock prices typically plummet, which scares investors. This generally leads to the pullback of capital from global and Indian markets.
What is a recession?
A recession is a decline in economic activity that lasts for months or even years. Experts declare a recession when a nation’s economy experiences negative gross domestic product (GDP), Employment, Real income, and industrial production. Usually, it’s called recession when markets correct by 20%
Signs of recession
A sustained period of high unemployment, declining retail sales, and a contracting economy i.e gross domestic product (GDP). The graph below represents the economic cycle of every country.
Recessions are considered an unavoidable part of the business cycle and also an important one.
What causes recession & bear market?
In business cycles, a recession occurs when continuing economic growth peaks, reverses, and becomes continual economic contraction.
- High-Interest rate
- Low confidence in Economy
- Declining GDP
- Manufacturing orders slow down
- Unemployment (We talked about it earlier)
- Deflation
- Asset bubble (I will talk about it below)
So a few questions may have popped up in your head like, “if the markets are falling and asset prices are surging what should I do with my portfolio?”, and “where should I allocate my new funds?”. Remember, you have to beat inflation too.
Should You Be Investing During the Recession?
Let’s learn from The Great Recession, it was the worst economic turndown. It lasted from December 2007 to June 2009. Yeah, 18 months. Historically speaking, this turndown is a part of the economy. The GDP during this time was down by 10% and unemployment reached 25%!
Eventually, the markets are known to recover and outperform for a longer time frame.
Watch “The Big Short” movie if you want to know more about what the ‘Asset bubble’ looks like and what went wrong in 2007 which caused The Great Recession.
During a bear market and at the rising risk of recession the market keeps declining significantly and no one likes losing their hard-earned money. So here is how you can save your money and find new opportunities.
As they say “A penny saved is, a penny earned ”.
Where can you park your funds?
The best part of investing during the recession is you get to buy shares of great companies at much lesser valuations. You can buy great companies which have a moat, and on which you have conviction. And earlier the valuation wasn’t in your favour.
If you find it tough to spot great companies, investing in index funds or smallcases would work wonders for you!
From the graph, you can interpret that the markets perform well over the long term. That’s why it’s a suitable time to invest in the share market if your time horizon is longer (5-7 years).
If you are a conservative investor who wants wealth preservation, Gold and Bonds can be your go-to option. Why? A downturn in the economy may lead investors to prefer safe-haven assets like gold to reduce their exposure to volatile assets like stocks and bonds.
Gold is known to be a safe haven asset, so when there is increased demand for it, its price goes up naturally. Also, gold is considered a hedge against inflation.
Bonus
If you are someone willing to take risks and aim for long-term wealth creation. During the time of bear markets/ rising risk of recession, the most affected sector is IT. As we know the entry of Reliance Jio made a huge leap in Indian markets and an overall rise in e-commerce eg ONDC. With this rise and shine in the internet world, IT gets a huge benefit.
Other sectors which are good to buy in a bear market or at the risk of recession are Consumer goods, Pharmaceuticals, Utility stocks, and precious metals.
Conclusion
A smart investment strategy to perform well in bear markets and recessions is to buy great businesses and hold them for years. This will help you buy a business with a strong balance sheet for a cheaper price and create wealth for you in a longer timeframe.
These are my thoughts and not investment advice. Do consult your financial advisor before investing in any of these.
You can also read:
- The Silent Billionaire – From “Markets to Supermarkets”
- Transforming Gold Market – Look Beyond Import Duty Cuts
- Is Tata the Maruti Suzuki of EV – The Futures of EV in India
- Which Company Bought 1st Supercomputer in India?
FAQ’s
Q. What investments do well in a recession?
During recessions or market corrections the most affected sector is IT. Investing in IT sector, utilities, and basic consumer goods conglomerates might be a safe option to invest in. If you find it difficult to find such stocks, Index funds would work wonders.
Q. Is it good to invest during a recession?
Yes, The best part of investing during the recession is you get to buy shares of great companies at much lesser valuations. You can buy great companies which have a moat, and on which you have conviction
Q. What should you not invest in during a recession?
Companies with leveraged, cyclical as these companies pose the biggest risk during the time of recession.
Q. Do investments increase during the recession?
Investments like Gold, Consumer goods, and Pharma tends to perform better than other investments.
See you in the next one 🙂
Happy Investing!
Disclaimer: This blog is not to be construed as investment advice. Trading and investing in the securities market carries risk. Please do your own due diligence or consult a trained financial professional before investing.
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