What investments should you buy in a recession?

December 6, 2018

It goes without saying, the ideal time to buy investments is when they’re at a low point, and selling them when they’ve increased in value. ​

Some investors do this by watching a country’s economic cycle.

If you’re clever, you can identify the stage of the ​economic cycle you’re in, and purchase your investments in the economic cycle that they’re most likely to ​​be lower in value.

Here's an explanation of what a slowdown, a recession and a depression is, and which industries to consider (or avoid) buying investments in, over these times.

A slowdown occurs when the rate of growth decelerates – but national output is still rising. If the economy grows without falling into recession, this is called a soft-landing.

A recession is a fall in real GDP for two consecutive quarters (six months).

Some key indicators are:

  • ‍rising unemployment and fewer job vacancies available for people looking for work
  • ‍a rise in the number of business failures and businesses announcing lower profits and investment
  • ‍a decline in consumer and business confidence
  • ‍a contraction in consumer spending & a rise in the percentage of income saved
  • ‍large price discounts offered by businesses in a bid to sell their excess stocks
  • heavy de-stocking as businesses look to cut back when demand is weak – causes lower output, and / or
  • ‍government tax revenues are falling and welfare benefit spending is rising.

What's the difference between a recession and a depression?​

  • ‍a slump or a depression is a prolonged and deep recession leading to a significant fall in output and average living standards
  • a depression is where real GDP falls by more than 10% from the peak of the cycle to the trough, and / or
  • ‍an example of a country that has suffered a depression in recent years is Greece. National output has fallen in six successive years and real GDP is more than 25% lower than at the peak of the cycle.

What's the best industries to invest in during this time?

If you start seeing the signs of an economic slowdown, look at the defensive-oriented sectors — those in which company's revenues are supported by selling products which people are less likely to cut back on during a recession.

Industries would include consumer staples, utilities, telecommunication services, and health care. So products you might consider would be toothpaste, electricity, phone service, and prescription drugs.

Historically, these sectors have performed well during a recession.

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