How should one invest amid rising fear of recession?

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How should one invest amid rising fear of recession?

 How should one invest amid rising fear of recession?
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Highlights

  • Economists have already warned that the UK economy may fall into recession this summer.
  • During the slower or negative economic decline, investors need to act cautiously but remain vigilant in monitoring the market to grab the opportunities at lower prices that may generate higher returns in the long term. 

A recession is a prolonged period of negative economic growth with rising inflationary pressure. Economists have already warned that the UK economy may fall into recession this summer amid the biggest squeeze on the household incomes and slow economic recovery due to sharply rising inflation.

If the Gross Domestic Product (GDP) of a country falls for two consecutive quarters, that is a recession, whereas stagflation can be defined as a persistent increase in inflation during a period of weak economic decline. During the recession, some sectors may continue to grow, while others will contract, but the overall economic activities will fall during a recession.

 As high-quality stocks generally trade at a premium, a recession can create a buying opportunity for a lifetime

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During the slower or negative economic growth, investors need to act cautiously but remain vigilant in monitoring the market to grab the opportunities at lower prices that may generate higher returns in the long term.

 

VIDEO: What Is Stagflation? How Is It Different From Inflation? - YouTube

 

During the recession, the worst-performing assets are highly speculative, cyclical, and leveraged and investors should keep a distance from these stocks as they are highly risky and could go bankrupt. However, high-quality stocks with strong fundamental, low debt and good cash flow that has proven in the past that they can do well during tough economic condition can be considered during the recession.

 

Recession may create the best investment opportunity

During a recession, investment and spending in an economy fall, and companies generate lower profits which affect their stock value. But if we look at the positive side investor may consider investing in their favorite stock at lower prices than they believe may generate returns but be trading at a high price that they can’t afford.  

As high-quality stocks generally trade at a premium, recession can create a buying opportunity of a lifetime

2022 Kalkine Media®

As high-quality stocks generally trade at a premium, recession can create a buying opportunity of a lifetime as best stocks also gain market share when their competitors are cash strapped. A recession creates various opportunities; short selling is one approach and owning recession-proof investments is another.

Also Read: Gripped by a cost of living crisis, the UK risks facing civil unrest

 

Investments to consider during a recession

  1. Stock funds

Stock funds such as Exchange Traded Fund (ETF) or a Mutual Fund is a wonderful way to invest during the recession as these funds tend to be less volatile and offer diversification and the potential for high long-term return.

  1. Dividend stocks

Investing in dividend stocks offers a fantastic way to generate passive income with low volatility and risk. High-quality dividend stocks tend to fluctuate less and ensure you are getting some return even in tough economic conditions. However, before considering investing in any dividend stocks it’s important to do your research and select those stocks with strong fundamentals, positive cash flow, and low debt-to-equity ratios.

As high-quality stocks generally trade at a premium, a recession can create a buying opportunity for a lifetime

2022 Kalkine Media®

  1. Defensive stocks

These are the stocks that make uniform profits throughout the economic cycle as they offer goods and services that are essential, and consumers buy them regardless of their economic conditions. For example, consumer staples, healthcare, and utilities. These companies remain unaffected as their contracts are not related to the economy but long-term defence policies.

Also Read: What type of investor are you?

  1. Value stocks

Value stocks are the stocks of the company that are trading at a price lower than their intrinsic value and are often regarded as a recession-proof investment because they have limited downside. However, one of the biggest investment myths is that stocks with a low price-to-earnings (PE) ratio are to be considered, but just because stocks look cheap does not mean it is a worthwhile investment as they might not be fundamentally strong. So before making any buy call it’s always suggested to do your own research.

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  1. Real Estate

During the economic downturn, real estate prices tend to drop due to lower demand and spending power. This may create a buying opportunity for investment properties, and you can make a passive income by renting out the property to a reliable tenant.

 

  1. Precious metals

Prices of precious metals such as gold and silver usually perform well and are used as a hedge against economic slowdown and inflation. But during the recession, the demand for these metals often increases which leads to an increase in their prices. However, you can invest in precious metals by investing in stocks or ETFs that invest in securities related to these metals.

2022 Kalkine Media®

  1. Cash

During the recession, you should always keep some cash aside in your saving accounts as it can generate a small return as compound interest accumulates and reduce your portfolio risk. Most importantly having cash available will allow you to pick up bargains when the correction slows. 

Note: The above content constitutes a very preliminary observation or view based on market trends and is of limited scope without any in-depth fundamental valuation or technical analysis. Any interest in stocks or sectors should be thoroughly evaluated taking into consideration the associated risks. 

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