Best Investments in a Recession
Since it's almost consensus that we will enter into recession territory in the coming couple of years, what asset classes and/or specific industries should we invest in for capital preservation or even an opportunity to make some gains?
If we're not shorting, are there counter-cyclical options? In terms of equity, I've considered cinema, cosmetics, and contraceptives. Or maybe I should go with fixed income or even cash.
This should be an interesting discussion.
liquor stores
Short Cars manufacturers, Travel agencies.
Could go long anything that consumer need on a daily basis but don't expect much returns as now most of the equity returns or losses are heavily correlated with the market. Hence if the market plunges, although a firm might still do well, its shares will most likely be down to. That's why I wouldn't go long any equities in a recession.
Long Gvt bonds/gold.
How do you feel about going long on McDicks?
Ehh.....gold will do ok but don't necessarily expect to make a killing. For example, see how it performed in the recent turmoil. On days the market was down -2%, gold was up like +0.2%. Better than losing money but still not exactly the play of the century.
Also, remember that in 2008 when there was a liquidity crisis, even gold was smashed into the ground at the first as people were selling everything. It only made a great comeback after the initial crash.
In short, gold is good but kind of hard to predict how it will react under any given situation. Might not be a slam dunk even if you predict the recession perfectly.
Never said it would be the play of the century, but when economies are bad people invest in safe assets (CHF, JPY and Gold).
All of the assets were being liquidated in 2008.
No disrespect, but ideas like these are why value shops will do well come next recession. If this is the consensus then it is definitely a good idea to buy any decent business with even a slight moat.
Gold miners or a Gold ETF would work well in a recession, apart from physical gold and treasuries. The trick here is timing the market, which is very hard to do, so you may be losing money on gold rather than enjoying the last 6 months or 1-2 years of the bull market.
A quick exercise would be to look at the beta of companies, and pick the ones with the lowest one. Typical sectors that work well are consumer staples (the Unilevers of this world, detergents/toothpaste/diapers manufacturers), utilities (gas, esp. in Europe over next few years), maybe telecoms and healthcare.
Short the crappy stuff.
Government-contracted infra up in Canada.
Curious why you'd go long cinema in a recession? Usually people go short on items that utilize discretionary spending. Is your assumption movies replace actual vacations?
disclosure - I've held a relatively small position in CNK for a while now and am sitting on a nice gain. Not likely to sell, but surprised to see you saying long cinema in a recession
Had a similar thought. Cinema trip for a family of four along with popcorn and a drink is +/-$50 on the conservative side.
Dang not sure where you live but $50 wouldn't even cover all 4 tickets for me. like $14 an adult and $10-$12 per child.
But yeah that's an interesting point. Movies replacing vacations. But odds are things like triple A titles get produced less so the moviegoers that would go to watch all the Marvel / DC / Disney movies have less reason to go as frequently in a given time period thus spending less. I'd bet it would net-net out about flat in a recession.
Long HLI (Houlihan Lokey)
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Agree with above. Sense leads you to go consumer staples but today, everything goes down with the market.
But for the sake of the original question, let's assume the call is correct and that you will be able to position appropriately ahead of it, I would buy US treasuries. Liquidity is paramount in a recessionary environment (assuming you want to buy low back into equities at some point), and treasuries are about as liquid as it gets. They will also benefit doubly from a flight to safety trade, and likely the federal reserve cutting interest rates (though you could argue rate cuts get priced in via the flight to safety).
If your original question is aimed towards how should you position within your equity allocation, I would suggest that you focus on high-quality companies that are more indifferent to the economic cycle with regards to their demand profiles (I would most likely suggest this regardless of your view on the cycle, but that's another discussion). Some characteristics of a business that would fit this profile would be: Recurring revenue streams, high customer retention rate, sells need-to-have vs nice-to-have products/services, sells products/services that are routine purchases for its customers, less capital intensity both via capex and working capital tie-up, clean balance sheet or adequate ability to service debt if you model a cut to cash flow... You also want to think about how exposed to the cycle a business's customers and supply chain are, and what the health of those businesses is. Lastly, you may want to have a look at their M&A history to get an idea on how disciplined they've been in past cycles: were they buying at the top and selling at the bottom or vise versa? If a business was selling at the bottom, it was likely out of necessity to inject liquidity, which imply a more cyclical business or balance sheet issues (how does their balance sheet look today vs then?).
So I would recommend focusing on better businesses on a business-by-business basis vs picking a certain industry that may hold up.
beat me to it.
show me one time when economists have accurately predicted a recession. the IMF studied this: "How Well Do Economists Forecast Recessions?" by An, Jalles, and Loungani.
everybody is quick to assume economists are correct, but no one ever checks their track record.
Long Durex Short Banks
Essential services like waste removal, utilities, apartment REIT's (if low debt and have stabilized core assets), and sin stocks (DEO, TAP, MO) are some examples that will fare better than the S&P 500 during a downturn. I also like companies such as Microsoft and Adobe that have huge competitive moats because their products are far superior to any competitors (if any) and hyper critical for operations (imagine finance without Excel or marketing without InDesign). Also, Druckenmiller recently opined that he believes more firms in the US will transfer critical storage to the cloud as a cost saving measure, which makes sense.
Short consumer discretionary, real estate development, home-building, luxury goods, and hotels.
CASH
When SHTF cash is the best thing you can be holding. Ratchet up the stops on your portfolio after every month or so of gains, and then bail out when things get hairy. If you want to short the major indices, go for it. After the initial shock, gold might be a good play but remember everyone is already banking on that.
My only quandery is HOW THE FUCK we HAVEN'T had a recession yet. Aside from a bit of a corporate tax cut, the entire global economy is whacked and the US is grossly mismanaged. It's like watching someone pounding booze, speedballs, and eating bacon at every meal and knowing they're going to have a massive heart attack....but also being confused they haven't already. That's the US economy. Even interest rates staying low is a stupid idea because when the recession does come....what are they going to use to stimulate the economy? Trump's glorified rebate plan in lieu of real trillion dollar infrastructure plan killed the only thing that could have earnestly held things together.
It's hard to know when the bottom is. The tipoff that things are going to improve is when something changes: look at the massive gov't action in 2009, the entire economy was underwritten by the taxpayer. When people have totally despaired and sold off, wait for a couple of months of upward trend, then buy the next dip.
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