Investing during a recession is undoubtedly risky, mainly because the duration and recovery scope of any crisis tends to be uncertain. The coronavirus pandemic, for example, is a classic example of a period in modern life that could not be predicted in advance. Its effect on the global economy has been a sudden decline in spending, which is one of the hallmarks of a recession.
As medical and scientific experts continue to work towards a solution, investors might be hesitant to think about investing. It’s understandable, as attempting to predict an end might be guesswork at best, and a double-dip recession – a recession, followed by a short recovery period, followed by a second recession – is possible.
However, for investors who are keen to make the most of the opportunities that arise during economic downturns, there are benefits to be gained. Razi Salih, a businessman with over a decade of experience, has established several successful projects in the fintech, digital marketing and real estate sectors.
An economic downturn is not the time to take unnecessary risks or experiment, particularly with investments. For most investors who decide to act, playing it safe is recommended. Doing this involves finding companies that have good cash flows and strong balance sheets or business models. The key to knowing these types of companies is to study financial reports carefully. Examples of companies that have these characteristics are basic consumer goods providers and utilities.
The general idea when it comes to looking for safe options is to focus on companies that provide essential goods. Cyclical products and services tend to be affected by economic headwinds, and during recessions consumers tend to spend less money on them. Non-cyclical options such as grocery stores have a constant demand, making them suitable for investments.
Outside of the equities market, investors can also look at alternatives such as real estate and the commodities market. Tough economic times typically lead to a drop in home values, providing opportunities for investors to purchase properties at lower prices and sell for a profit when the economy bounces back. Even during a recession, an investor can generate passive income by renting property. In the commodities market, gold, in particular, has shown resilience during recession periods, making it a safe alternative.
From a general perspective, investors do not behave in the ways that conventional financial theory dictates. Rather than displaying rational behaviour to maximise utility, many investors are overcome by emotions such as fear and anxiety during uncertain times, leading to panicked selling. The field of behavioural finance is helping investors understand risk and how people act during tough times.