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Friday, March 1, 2024

Never Waste A Good (Economic) Crisis

“Our country is facing a stark reality. Our economy has not grown at any meaningful rate for over a decade.” This was among South African President Cyril Ramaphosa’s sobering opening comments during his February 2020 State of the Nation address. A downgrade looks inevitable. Recession is on everyone’s lips and sluggish growth will continue to hurt employment and state delivery, but not everyone suffers during an economic downturn.

There are always businesses that buck economic trends, and if you are a savvy investor, you can turn an economic crisis into a potential windfall. Let us consider some sectors that might bode well in a well-balanced portfolio.

Discount retailers – Discount retailers usually do well and are generally immune to market fluctuations. But in times of recession, their stocks often spike as typically ‘wealthy’ consumers, who usually support more upmarket outlets, turn to cheaper shopping options. In the US, companies such as Walmart fall into this category. 

Sin industries – When the economy booms, consumers are comfortable to buy big-ticket items like designer clothing, electronics, appliances and cars. But as economies dip, and consumer confidence falls, people turn to smaller treats: a drink, chocolates, cigarettes. What is interesting is that the gambling industry takes a knock during times of recession, as people generally prefer to gamble when they feel lucky, and this is a sentiment felt when the economy is booming. 

Selected services – During hard times people typically stop replacing big-ticket items. Businesses that service, maintain and repair equipment may experience upticks in their businesses. Often you may find as sellers of machinery, cars or appliances slow down, while their service industries will look up.

Real estate – Property can offer a safe haven for money and, although returns may fall during times of recession, there is a long-term payoff. In addition, property values don’t drop too significantly during recession, as people always need homes and office space.

There are always businesses that buck economic trends, and if you are a savvy investor, you can turn an economic crisis into a potential windfall.

Selected stocks:

o   Core sector stocks – Companies supplying goods that consumers need will always weather economic storms, the likes of healthcare and pharmaceuticals, utilities (including mobile communications companies and satellite television), consumer stable goods firms.

o   Reliable dividend stocks – There are companies that consistently pay out dividends, year after year, no matter what the economic cycle. Dividend pay-outs give an investor a nice passive income during recessionary times.

It must be remembered, however, that in-depth research and understanding of the underlying fundamentals of markets and businesses are required. Just because a company may fall into one of the above categories, it does not guarantee its performance.

Investments that offer buffers during recessionary times are not limited to businesses. You can also look to the following when markets plummet:

Precious metals – When people get skittish about the market, they look for safe investment options. Gold, silver and other precious metals often gain in value during recessionary times. Most banks will have facilities for people to invest in precious metals.

Art – Art provides a safe haven for money during times of recession. It is a tangible asset, and a good piece will always increase in value. Before buying, always check in with the experts.

Yourself – One of the best places to invest to ensure you can weather the recessionary storm is in yourself. An investment into personal skills development will mean that when recession hits you will have the requisite skill set to ensure that your job can weather the bad times and you remain in demand. 

*Always expert financial advice from a reputable financial services firm when making financial decisions.  

Never let a recession derail a cool, calm and collected investment approach. 

There are no quick fixes to successful investing and wealth creation. To succeed in times of low growth, investors must be savvy about how they structure investments to ensure that they get the best returns on their savings. Wealth creation requires a long-term and impartial, unemotional approach to investment decisions; no reactive buying and selling here!

Working hand-in-hand with a good financial advisor is the best place to start. But here are a few ways to ensure you look after your portfolio in times of recession.

Portfolios and diversity

The best way to ensure your investment portfolio is robust enough to ride out economic rollercoasters is to diversify, so that in an economic downturn, you may lose on the swings, but you will win on the roundabouts.

The ups and downs of equity markets

In times of recession stock exchanges lose billions but when the tide turns the value in the markets grows exponentially as people start investing back into equities (shares). Markets are cyclical and will eventually bounce back. To get value, you need to be invested for the long-term. 

Equity markets and value

An economic downturn may be the best time to look at investing inequities. The reason for this is that stock prices fall, the share price versus the actual value of the company is often skewed, and good companies can become undervalued. If you invest in undervalued companies, you stand to make a windfall when the economy improves for the better. Getting this right, however, is a science, and it is advisable to speak to an expert.

Bonds and their yields

In an economic downturn, emerging market bonds can be a good place to invest. Emerging market bonds carry much higher yields than developed market bonds, and many investors consider the returns to be gained from these investments to be extremely attractive, given that bonds are fairly safe investments.

Offshore investing

A really good way to diversify your portfolio while the South African economy is in a slump is to look to taking a portion of your savings offshore. There are number of ways you can make this money work for you overseas.

Author: Gaye Crossley

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