Economists worldwide are warning that we may be in for a deep global recession. It may still be too soon to calculate the exact damage of the coronavirus pandemic on most countries and businesses. However, the early signs are that many economies are currently contracting. Therefore I’d like to discuss how investors could consider preparing their portfolios in case we’ve an economic slowdown.
Preparing for a recession
My Motley Fool colleague Alex Busson recently wrote in depth about several recessionary signs to look out for. And he concluded that “now, with so much of the economy shut down, it seems impossible to avoid…. What matters most is that you’re prepared”.
I couldn’t agree more. And I believe now is a good time to review your portfolio to see if you’re set for the road ahead.
A recession is generally defined as two straight quarters of declines in real gross domestic product (GDP). In other words, an economy contracting over a six-month period.
We all know that in investing, risk and return go together. Where there is a potential return, there is also a potential loss.
Diversification is all about reducing risk. Although it’ll not eliminate all the risk in your equity portfolio, your long-term risk/return ratio is likely to be more attractive. And that is especially important in a recession.
Once you’ve decided how much of your wealth you’d like to have in equities, you should consider allocating your money among different types of shares.
Industries I’d consider
Certain industries and stocks tend to do better during recessions. Defensive shares may help investors protect their capital and still get acceptable returns, especially in times of economic uncertainty. If they also provide robust dividends, it’s the icing on the cake. Receiving regular dividends enables investors to have a constant stream of passive income.
For starters, supermarkets, which are consumer staples, are generally resilient. After all, no matter how bad the economy may be, we’ll all have to eat and buy household as well as personal hygiene items.
Not surprisingly, despite the sell-off in broader markets, shares of supermarkets and grocery stores have been holding up rather well.
British supermarkets include Morrisons, Ocado, Sainsbury, and Tesco. Other than Ocado, they all pay dividends.
There are other defensive shares that may also be appropriate for a recession. For example, utilities and telecoms don’t require people to leave their homes to make money.
BT Group, Centrica, ContourGlobal, Drax, National Grid, Pennon Group, Severn Trent, SSE, Talktalk, Telecom Plus, United Utilities, and Vodafone would be among the shares I’d analyse further. Many of them offer robust dividends too.
In addition, a large number of investors regard commodities and especially gold as ‘safe havens’ during financial struggles. When the price of gold increases, gold mining companies usually have a bright time too.
Which miners could be worth backing? Within the FTSE 100 and FTSE 250, companies that mine gold include Chile’s Antofagasta, Mexico-based Fresnillo, Russian mining operation Polymetal International, and Centamin, which focuses on the the Arabian-Nubian Shield.
No economy goes up constantly in a linear fashion. So we can expect it to stumble periodically. Eventually, however, recessions end. Until then, investors need to stay focused and disciplined.
tezcang owns shares of Morrisons. The Motley Fool UK has recommended Fresnillo, Pennon Group, and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.