It’s official, Australia is sliding into recession and there isn’t much that we, or for that matter Rudd, can do about it. The best we can do is to accept that the investment horizon has changed for the time being and to arm ourselves with the relevant information and strategies to manoeuvre our portfolios through the lean times.
In the meantime, a couple of recession-proof stocks can provide a buffer within your portfolio while you wait for the market to take off again.
One of the big mistakes that investors make during recessions is to call the bottom of the sharemarket too early. Jumping on board your favourite high-growth stocks in time for the upturn can be a costly exercise if share prices stagnate for longer than anticipated.
If a company is reporting bad news, it’s probably not the best time to buy – regardless of how super-duper you think its products are or its management team. Yes, the shares could be cheap (especially compared to the recent past) – but is the worst over for the company? Has the stock bottomed? Or could there be more pain to come? A better bet is to wait until the stream of bad news appears to have ended, or when the market has taken a turn for the better.
When investing during recessions, it’s important to keep an eye on the big picture. When recessions hit, consumers cut back spending, businesses respond by reducing business investment – and this pattern can be repeated for quite some time in a negative spiral. As people become increasingly pessimistic about the future, they stash away even more cash, forcing more businesses to lay off staff and shelve expansion plans and so on.
But not all companies suffer falling earnings and share prices during recessions as outlined below. These companies either sell goods and services that are necessities of life (utilities such as gas and electricity, tax and funerals for example), or sell lower-cost goods and services that experience a pick up from hard-pressed consumers trading down to lower priced goods during a recession.
If you do pick up some recession-proof stocks, be mindful that these stocks will probably perform relatively worse than cyclical stocks during the recovery. You might look to readjust your portfolio at this time.
A final point mentioning is that recessions can actually be a good time for stock pickers. When an economy is booming, the majority of companies will experience a lift in revenue – and when profits and share prices are shooting skyward, every company looks like a good bet. It’s only during tough times that the clever companies shine. So if you spot a company in a hard-hit industry that’s expanding – opening new stories, launching new products etc. – then do some more research. It could be the gem stock that you’ve been looking for.
When cash is tight, consumers don’t stop spending altogether. After all, consumerism is at the heart of our culture and dominates our urban landscape (just compare the number of shops and malls to parks and other free spaces to understand why we’re all shopaholics).
During recessions, consumers shun luxury for discount – benefiting discount retailers and fast food outlets over brand-name goods. The Reject Shop, McDonalds and Domino’s Pizza, for example, delivered strong earnings growth over the second half of calendar 2008, while spending at restaurants and cafes fell by around 2.2% over the same period.
Some businesses carry on regardless of the economic climate. Pharmaceuticals, healthcare, tax and accounting, funerals, waste disposal and aged care services will carry on business as normal during recessions. People continue to visit the dentist or doctor, pay their tax, and die during recessions. You may find that stocks in these industries may offer more consistent returns during down times provided that you don’t buy the shares at an already inflated price.
Wine, coffee, chocolate, cigarettes – these low-cost pleasures can be a small respite for some people during lean times. It’s often the case that sin industries such as alcohol and cigarettes continue to perform well during recessions as consumers switch big-ticket purchases such as cars and plasma TVs to smaller comforts.
Contrary to what many people think, gambling is one of the few sins that tend not to hold up well during recessions – impacting gaming companies such as casinos.
Other articles in this week’s newsletter