A recession implies to a widespread and significant decline in economic activity, which tends to last for a few months. As per Kavan Choksi, a recession is generally defined as two consecutive quarters of negative gross domestic product (GDP) growth. The symptoms of recession include declining sales and production, falling real incomes, weakening employment, as well as faltering confidence on the part of consumers and businesses. Recessions often increase the risk aversion of investors.
Kavan Choksi discusses the type of investment portfolio strategy to follow in a recession
While recessions tend to be relatively rate, they do expose economies and portfolios to the possibility of rapid declines. This invariably leads to an increase in risk aversion among investors During recessions, gold and bonds, including those issued by the U.S. government and investment-grade corporations, have historically performed the best. In contrast, high-yield bonds and commodities have typically experienced declines similar to stocks. Investors who are experienced know that they are unlikely to be able to predict a recession in time to flee risk assets for safe harbours. Hence, they try to maintain a diversified portfolio that improves the odds of recouping losses sustained in a recession during the subsequent recovery.
The safest stocks to invest in and own in a recession would be the ones of large, dependable and profitable enterprises having a long track record of weathering downturns and bear markets. Enterprises with robust balance sheets, as well as healthy cash flows generally fare well during in a recession, especially in comparison to those carrying heavy debt or facing big declines in the demand for their products.
As per Kavan Choksi, investors should keep a portion of their portfolio in cash or cash equivalents to take advantage of investment opportunities and cover unforeseen expenses. Investing in money market funds can also be a good idea, as they offer better returns than traditional savings accounts while maintaining liquidity.
The consumer staples sector has historically outperformed during recessions. This happens as it supplies products that consumers tend to purchase regardless of their financial situation or prevailing economic conditions. Consumer staples include household goods, alcohol, tobacco, toiletries, food and beverages. On the other hand, automakers and appliance retailers may suffer during recessions, as consumers and companies cut spending.
Recessions are rare events, and most countries have monetary and fiscal policies in place to promote recoveries. Economies generally rebound even in the absence of policy support, as the imbalances that led to the recession are corrected. When a recovery takes hold, discerning recession risk factors like high operating leverage as well as a dependence on economic momentum may turn into advantages for growth and small-cap stocks that are likely to have become undervalued in the meantime. The increased demand for risk in fixed income markets makes corporate debts and mortgage-backed securities relatively more attractive. As risk premium declines, so does the yield spreads for such debt over U.S. Treasuries that have a similar maturity. Government bonds also tend to decline, there pushing up the yields. This means that riskier debt could still lose value in absolute terms even if it outperforms Treasuries. A return to growth is generally good news for commodities, as higher economic activity boosts demand for raw materials
