No company is 100% immune to economic downturns, but some are better placed than others to weather the storm and sometimes even thrive despite what’s going on with the economy. Such companies might be worth investing in for potential solid long-term returns.
We take a look at three examples. Note that the companies best placed to weather the storm are mainly those that offer essential products and services. Essentially, they’re companies that people cannot do without even in the midst of an economic crisis.
1. Fast-moving consumer goods
Regardless of the status of the economy, there are several household items that people still need on a regular basis. These include packaged food and beverages, toilet paper, toothpaste, laundry detergent, dish soap and so on. These are known as fast-moving consumer goods.
Since these items are always in demand, in good times or bad, the companies that make them, especially the large and well-established brands, are usually able to weather the storm.
Good examples here are Proctor and Gamble (P&G) and Unilever.
Right now, these two are leaders in the global consumer goods market. The companies offer essential products and have a decent history of good performance and strong balance sheets. These companies might be worth investing in.
2. Large retail chains
Like companies that make fast-moving consumer goods, large retail chains that sell these items to customers are also usually able to weather economic storms.
In the UK, you need look no further than Tesco, the largest supermarket chain in the country.
In the midst of the pandemic, the company saw a 29% uplift in pre-tax profit in the first half of 2020 (up to the end of August) as group sales rose by 6.8% to £26.7bn. This was despite the company facing up to £533 million in Coronavirus-related costs.
In the UK alone, its ROI sales rose 8.5% to hit £24.3bn. Some of this will be returned to shareholders in form of dividends.
The company’s success is not surprising, especially now. The pandemic has forced the closure of non-essential shops, bars and restaurants in the country. This has shifted spending to supermarkets. Food item sales have gone up as more people buy items from supermarkets to cook at home rather than eating out.
So if you are an investor looking for blue-chip companies to invest in that have a proven ability to withstand economic downturns, a retail chain like Tesco might just be your answer.
3. Healthcare
Like fast-moving consumer goods, no matter what’s going on economy-wise, healthcare products are always in demand.
Pharmaceutical companies are among the big winners here. People will still get sick and need prescription drugs even when the economy is bad. Business for such companies therefore remains good even during economic crises.
Right now, there’s a huge buzz about the growth prospects of pharmaceutical companies that are developing tests and vaccines for Covid-19, such as AstraZeneca. These companies could be worth investing in.
How to invest during a downturn
One thing to keep in mind when choosing companies to invest in is that regardless of the severity of past economic downturns, markets have historically always recovered.
A market downturn can be a blessing in disguise for investors. The value of many companies tends to go down in bad times. This presents savvy investors with prime opportunities to buy stocks and shares cheaply.
But if you choose to pounce on this chance, you have to play the long game. In other words, you have to give your investments time to ride out the downturn and recover.
It’s also wise to keep a diversified portfolio. You can do this by investing in companies in different industries and in different asset classes like shares, ETFs, mutual funds and others. As explained by the Money Advice Service, this helps to reduce the risk of your portfolio underperforming or losing money.
