It won’t come as a surprise to many that the economic impact of lockdown across the globe has resulted in a recession for the UK. Recession affects everyone but here we are concentrating on what it means for your investments and how you should play your hand moving forward.
It stands to reason that lower spending in an economy will result in lower earnings for a company, negatively affecting the price of its shares on the London Stock Exchange. Stocks that are in tune with the overall health of the economy are referred to as ‘cyclical stocks’. Cyclical stocks typically sell items or services that are in demand when the economy is doing well, these same items are the first to stop being purchased the moment consumers prioritise saving over spending and are usually luxury or big ticket items.
The opposite of these are ‘defensive companies’ or goods and services that are deemed necessary such as water, food and household goods. These defensive companies will often still fall in value during a recession but to a much lesser degree than cyclical stocks. The other types of stock that fare better in times of recession are companies that are viewed as ‘quality growth’. These are companies that enjoy higher profits and are reliable in the marketplace and therefore more likely to survive the duration of the recession. As an example, in the past tech companies in the US have fared well in times of recession.
There are other stocks that are worthy of attention for investors in times of recession. These include government bonds and more notably gold which is currently experiencing record highs. However, without the ability to accurately predict when a recession is coming it is near impossible to plan for it by buying up stocks in entities that can withstand an economic recession.
The solution as always is diversification in order to ensure your portfolio can withstand recession as well as economic growth, to take the stress out of stock-picking take a look at “robo advisors” such as MoneyFarm who do all the hard work for you automatically