The global pandemic and economic downturn are boosting the likelihood of a recession. In fact, the International Monetary Fund predicts this year’s lockdown-induced economic slump will be the worst since the Great Depression. Global growth is expected to go into reverse with a 3% drop in 2020.
So the question is, would I buy stocks in a recession? I certainly would… but with some caveats.
Recession 2020 or bounce and boom?
Today I read about two brothers, both hedge fund owners in the US, each following a different strategy. One believes the buying opportunities are now and the financial markets will soon bounce back. The other believes a 2020 recession has already begun and much worse is to come.
Their opposite opinions perfectly reflect the volatility of the markets. One day it’s all doom and gloom, the next the Footsie is rising. One thing’s for sure, it’s a heady time to be a day-trader.
But I think the stock market winners to come out of this coronavirus crash and subsequent recession will be those with a long-term view of investing. To buy stocks in a recession, you need confidence in your purchases.
Best shares to buy now
So, if a recession has only just begun and share prices are likely to fall further, are there any good shares to buy now? Yes. But I’d go for solid market leaders.
Others clearly agree. Shares proving popular buys just now include Tesco, pharma giant AstraZeneca, alcoholic drinks giant Diageo and British American Tobacco. These are all good companies in sectors that continue to thrive despite the headwinds.
But it may be premature for beginners to buy stocks now unless you’re really confident in the company and prepared to wait for the business tide to turn. Instead, I think it’s the perfect time to be compiling a watch list of shares to buy when that tide does start to turn.
One to watch
A share on my watch list is Auto Trader (LSE:AUTO). It’s a profitable, well-run, FTSE 100 business, and it’s got the advantage that it becomes more valuable as its user base grows. Time will tell, but I imagine second-hand car dealing will increase once a sense of normality resumes. If so, then this could mean an increased profit margin for Auto Trader.
However, it carries risk. Many of its customers are car dealerships, likely to be hard hit in the event of a prolonged recession. The volume of car loans has rocketed in recent years. If customers can’t pay these loans, the cars will be returned to the dealership.
So far Auto Trader has been pulling out the stops to support its customer base. It waived fees and saw an increase of 60,000 cars listed on its site just before the government lockdown stopped all second-hand car dealing. This will cost it several million pounds in lost revenue but means people stuck at home can still browse a full catalogue of cars.
Since then it’s successfully raised £200m in an equity placing, boosting liquidity. Auto Trader offers a 1.5% dividend yield covered 3 times by its earnings per share.
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Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has recommended AstraZeneca, Auto Trader, Diageo, 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.