All about investing in times of recession

Recession is an opportunity in wolf’s clothing,” self-help guru Robin Sharma famously said in 2013 when talking about the recessionary cycles and the investment opportunities they provide.

With the onset of Covid-19, the new economic world order is likely to see more uncertainty and pessimism. The new reality consists of changing business models, launch of new unicorns that focus on digitalisation and remote working themes, massive job losses and survival of the fittest businesses.

Timing is everything
Investing during a recession or a downturn has always seen people earning good returns in the longer term. During the nadir of the 2008 – 2009 financial crisis, when the global markets crashed, a lot of good quality stocks were available at cheap valuations. The recessionary cycle also gave rise to a new generation of investors who were willing to bet on innovative companies. Some of the unicorns launched during that period include market leaders such as Uber, AirBnB and Square.

Soon after the onset of the Covid-19 pandemic, the market crash in February – March saw top quality stocks like Apple, Microsoft and Boeing trading 30 per cent to 50 per cent below from their year-to-date (YTD) peaks.

This provided a good value buying opportunity for long term investors. Currently, most of those stocks – especially those in the tech sector – have fully recovered their YTD losses and are even trading above their all-time highs.

Is there a ‘Recession Proof’ portfolio?
A lot of investment strategies are centred on providing ‘recession proof’ advice to ensure that one asset’s negative returns are balanced by positive returns from other asset classes.

Investing in cross assets such as equities and bonds as well as gold and dollar are often thought of as a well-proven solution. However during a recessionary sell off, price often leads market macros and fundamentals. This causes a huge dump across all major asset classes.

Case in point – the recent market crash due to the Covid crisis saw assets across the spectrum including equities, bonds and commodities suffer a huge decline. This flight to safety out of all risky assets – and even out of perceived safe havens like bonds – caused a major panic selling wave in the markets.

In reality, no portfolio is recession proof and is bound to be affected by market forces. What is required is a well-planned strategy on how to manage the downside risk so as to sustain investments in the longer term.

What are the best investment avenues during a recession? 
While the investment options are spread out across multiple asset classes, some are time-tested and often provide returns in longer term. Broadly, they can be classified into listed and non-listed investments.

In the listed space, the ability of the investment product to trade on secondary markets ensures that sufficient liquidity is available at all times. This includes assets like stocks, bonds, commodities and currencies.

Presence of multiple players in these markets ensures that entry and exit opportunities are multiple.

In the non-listed space, products typically involve huge single value block deals like investments in real estate, private equity as well as other hybrid over-the-counter (OTC) products. These involve a high degree of risk and consequently provide high returns.

What’s worked during past recessions? 
Beaten-down stocks with strong fundamentals and core-sector stocks have often given investors results in longer runs. Investors’ love for tech has again been proved this time with Apple recently hitting $2 trillion valuation. Sovereign and AAA rated bonds tend to gain during times of distress due to the low interest rate environment and monetary stimulus measures from central banks.

Previous recessions have also seen the rise of startups that are able to execute niche concepts. What really matters in the end for such companies is their ability to sustain and capitalise on first mover advantage.

The whole notion of value-investing during a recession relies on the concept of leveraging the current market conditions and capitalising on the opportunities. The human mind always hovers between the two ends of the spectrum – fear of losing and fear of missing out.

Anyone who is willing to balance out the tradeoff will likely emerge as the clear winner.

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Disclaimer: Trading in financial markets carries high risk of losses and may not be suitable for all investors