Where should you put your money in a recession?

A global recession may be looming; where should investors put their money? There are multiple options.

Article updated: 21 August 2019 10:00am Author: Michael Baxter

Ride it out?

Of course one approach is to carry on regardless. Long-term investors, who have created a balanced, diverse portfolio made up of inherently strong companies, may want to ride the tide. Stocks go up and down, in the longer term, stocks tend to rise and inherently strong companies can rise quite a lot in the long term.

Even so, history shows considerable gains can be secured by selling before a crash and buying when sentiment is low. Whether or not you choose to stick or try and beat the markets depends on you.

Sell on rumour, buy on fact

Stocks tend to fall in anticipation of a recession, but by the time recession finally bites, the bad news might already be priced in.

Take the period of the 2008 crash. The FTSE 100 passed 6,700 in June 2007. Fell to around 3,500 by March 2009 and recovered its full value in 2014. The time to have sold was at that point when not many economists were predicting recession — June 2007 was before the Northern Rock crisis, which itself pre-dated the 2008 crash by a year.

How could investors have been expected to have known to sell in 2007?

Actually, I think investors could have second guessed the crash. Not many economists predicted the 2008 crash or indeed the recession of that time, but the media were in tune to the dangers. Don’t altogether dismiss warnings of doom as media hype — it depends on the source and how good the argument, but the media can have a pretty good feel of underlying problems.

Go for safety

One option might be to invest in what they call defensive stocks — companies that operate in mature industries and pay out good dividends.

But I question how many such companies still exist. Obvious defensive stocks are utilities. The Centrica share price is a good example — shares down almost 700 per cent since 2013.

Go for bonds

The lower the interest rate, the more valuable bonds that were bought when rates were higher. It’s astonishing, but nonetheless true, that despite the fact that interest rates in the euro area, UK and US are incredibly low, (especially euro area) the next move in rates in these regions is likely to be down. If you believe rates may fall even lower than the markets are projecting — and If you do think this, I might be inclined to agree with you — then now might be a good time to buy bonds.

Look for companies that may benefit

Recessions can present opportunities for some companies — the creative destruction that occurs with recessions can create a vacuum which certain companies may fill.

According to Research by the Federation of International Employers (FedEE), Lego was a bigger winner in 2009 — profits up 63 per cent.

Certain car companies did well too. The report states: “Big German companies in the auto sector like VW and Daimler fared best. Daimler sales in China rose 137% during 2009-10 and volume sales of buses to South America rose by 20 per cent. But strong auto sales were not confined to German companies, as the biggest rebound in fortunes came with Ford, which began its renaissance back in 2006 and just kept growing as if the recession had never happened.”

Then again, despite the observations of the FedEE report, Ford shares collapsed in 2008, it is just that by January 2011, shares had risen sharply and were more than double the level pre-2008 crash. Daimler shares also crashed in 2008, and although they did pass the pre-2008 level at one point, as I write the share price is still lower than the price in October 2017, when shares were at a seven year high.

Other winners during the last recession include Royal Dutch Shell, Exxon Mobil and Novartis.

Oddly, the report made no mention of the giant techs, I would have thought they were by far the biggest winners during this period.

Actually, the Apple share price fell sharply in 2008, it is just that by the end of the 2009 summer, shares had fully recovered, and by spring 2011 had doubled the pre-2008 crash peak.

China also got off quite mildly from the last recession.

Every downturn is different

But the next recession — whenever that might be — will see quite different winners emerge.

For me, the companies with the brightest future are many of the techs, or other companies, perhaps like Unilever, which have done a good job in embracing technology.

I can say one thing, if we really are close to another recession, then there will be some big opportunities.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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