A financial downturn will generally lead to lower profits for many leading companies. For this reason, it only takes the expectation of a recession for a stock market crash or correction to occur.
But, investing during a recession also has a positive side to it. However, investors fear these economic downturns can create some of the best buying opportunities.
This article gives six investment options to profit from even during a recession.
Recession
A nation’s gross domestic product (GDP), which measures the value of its products and services, rises when things go smoothly.
However, this value decreases when the economy is weak. When GDP declines for two consecutive three-month periods, a recession indicates that the economy is declining.
Fortunately, following the recession brought on by the pandemic in 2021, the British economy is recovering well.
According to the Office for National Statistics, GDP decreased by 0.2% in December, but GDP increased by 1% over the prior quarter in the year’s final three months.
This seems unlikely because a recession always results in two periods of declining GDP.
Investing during a recession
During a recession, stock values often decline. It’s terrible news for an existing portfolio, yet leaving investments alone means not locking in recession-related losses by selling. But, lower stock values offer a solid opportunity to invest on the cheap (relatively speaking).
Growth and recession are also crucial to investors, as saving for the future are much more challenging when one doesn’t have steady employment or income. However, there is no direct correlation between economic output and stock market performance.
Extremists who believe in emerging markets have discovered that rapid growth rates don’t always result in profitable investments.
Although the UK economy isn’t projected to expand at a rate of 5% annually, it does have other advantages and opportunities that attract investors.
Here are six investment options when a recession hits.
Investment Options to Profit from Even During a Recession
1. Reliable Dividend Stocks
Investing in dividend stocks is an innovative strategy to create passive income even during a recession. Some experts advise looking for companies with low debt-to-equity ratios and solid balance sheets when considering dividend stocks.
2. Defensive stocks
Defensive stocks are frequently chosen to protect a portfolio against risk and market downturns, as they’re viewed as stocks that withstand economic downturns. Utilities and the energy industry are sectors to keep an eye out for because of their constant demand from society.
Therefore, defensive stocks offer an excellent opportunity to go long during recessions.
3. Value stocks
A value stock refers to a company’s shares that appear to trade at a lower price concerning its fundamentals, such as dividends, earnings, or sales, making it appealing to value investors.
Due to their low risk, value stocks are viewed as investments that can withstand economic downturns. Value stocks are valued closer to their underlying value than momentum and growth companies, which are geared for growth.
Also, value stocks are one of the excellent investment options to profit in a recession because, looking back at the recessions of 1980, 1982, 1991, 2001 and 2009, value tends to outperform growth for the next five years as the economy exits a recession.
4. ESG strategies
ESG stands for Environmental, Social, and Governance.
Which was first coined in 2005 and refers to a broad range of issues that could directly or indirectly affect financial relevance. Resource management, (green) supply chain management, organisational health, safety regulations, and trust-building through openness are a few topics under the ESG purview.
A company’s plan to achieve ESG goals, such as lowering energy usage, expanding the talent pool, and luring customers with environmentally friendly products, is an ESG strategy.
There are also strong arguments for employing an ESG investing strategy during a recession. Evidence demonstrates that environmental, social, and governance aspects influence a company’s long-term value, and ESG investment is quickly becoming a valuable addition to factor investing.
Management groups who take ESG problems seriously also reduce risk in their organisations. These businesses frequently outperform because investing during a recession necessitates switching to lower-risk assets.
Ethical investment practices are actively encouraged by concentrating onESG investing. It’s also increasingly seen to improve a managed portfolio’s performance by increasing returns and lowering portfolio risk.
As a result, investing in firms with strong ESG scores may prove to be more recession-proof.
5. ETFs with short exposure
Short ETF (or Inverse ETF) is an exchange-traded fund (ETF) constructed by using various derivatives to benefit or profit from a decline in the value of an underlying benchmark.
Investing in short ETFs is similar to holding different short positions, which involves borrowing securities and selling them, hoping to repurchase them at a lower price.
And even though short-selling individual stocks carries a high risk of loss, it may be pretty rewarding.
During bear market rallies, the most shorted stocks are frequently at risk. Exposure to the indexes most likely to decline is a more prudent course. Many growth stocks with the highest multiples are included in the Nasdaq 100 index, and these equities are the ones most susceptible to a downturn.
6. Financial
Finally, you should always keep a little money in savings accounts.
As compound interest builds up, cash will still produce a modest return and reduce your portfolio’s volatility, bringing you comfort and avoiding irrational choices. The ability to buy deals when the downturn slows will be made possible, most critically, by having cash on hand.
Summary
Investors should research before investing because a recession could result in significant losses. Because of this, the foundation of any investment strategy is knowing how much risk you can tolerate.
Though your company may have strong cash flow projections even during a recession, what looks good on paper may not apply to the real world.
If you’re unsure how to build a recession-proof portfolio, you can ask Trendscout for help.
Our platform connects angel investors and founders, specialising in creating purposeful, considered partnerships that drive profit and growth.
Give us a call today to find more information about investing options during a recession, and rest assured that someone will get in touch with you and assist you.
