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How to Invest in a Recession

New York

The coronavirus has forced countries into lockdown, killed the longest bull market rally in history, and wiped out trillions in lost productivity. Worse yet, no one can predict the end of the crisis.

Wall Street banks are lining up to warn that we are already in recession or that a recession this year is inevitable, despite the extraordinary interventions from the Federal Reserve and others. Goldman Sachs now forecasts a sharp contraction in developed economies in in the second quarter, including a 24% drop in US GDP, which is twice as large as the previous post-war record.

How deep this recession could be and how long the recovery would take is still a matter of speculation. Morningstar health strategist Karen Andersen says this recession will be different from the post-2008 Great Recession and while 2020 looks bad, coronavirus-induced recession won’t cause a long-term dent in GDP.

Short and Sharp?

The recession will be deep but short, because it’s triggered by an unexpected shock rather than any imbalances in the economy, says Nigel Green, the chief executive and founder of financial adviser firm deVere Group.

However, every recession produces a new world, and so will this one, he adds. “A Covid-19 recession is likely to fundamentally shift how we live, do business and invest,” says Green, pointing out “we’re moving towards an era of negative interest rates.”

The second cut of rates, now at zero, by the Federal Reserve – the world’s de facto central bank – suggests that the US could soon follow Europe and Japan by adopting negative interest rates. “Zero or negative rates will help boost financial asset prices and savvy investors will be seeking to top-up their portfolios by drip-feeding new money into the market at this time,” says Green, noting lower rates “will give more investors reason to increase their exposure to equities as the money won’t be working for them as cash deposits.”

Cash is Still King

It may already be a bit late for that, says Andrey Pavlov, professor of finance at Canada’s Simon Fraser University. “Financial markets are forward-looking, and prices have already adjusted to the reality of recession in the short-run,” he says. Now is the time to use the lower asset prices to create a comfortable portfolio with a mixture of stocks and bonds appropriate for the long-term, he says.

The best way to prepare for the unknown is to always have cash on hand, says Mary Hagerman, a portfolio manager with financial planner Raymond James. “Typically, for at least two years of living expenses in order to avoid having to sell investments should the markets retreat,” says Hagerman.

Investors should be revising their portfolios to mitigate risk, but they should also take advantage of the new opportunities that all crises inevitably spawn. When the tide goes out, new industries will emerge.

“The coronavirus outbreak can be expected to speed up the so-called Fourth Revolution, which is fuelled by new technologies, such as artificial intelligence and mobile supercomputing,” says Green.

Investors also need to position themselves for new opportunities such as technologies that enable working remotely. “We are also starting to interact remotely in our social lives even more, so any technology that helps with this - not just video conferencing, but virtual reality for meetings and gatherings, would become even more important,” says Pavlov.

The companies that survive and thrive during these times will likely attract investor attention. “Even if technology stocks looked expensive prior to this outbreak, technology is what is helping us work from home, order groceries online and watch movies while we self-isolate,” says Hagerman. “Technology may continue to dominate and there will be many more new business ideas coming from this sector.”

Bear Markets End

We strongly advise against trying to time the market. Looking back to the 2008 financial crisis, investors who didn’t panic sell were richly rewarded when the stock market rebounded.

At the portfolio level, it is important that allocations reflect the investor’s time horizon. “Somebody with 20 years to retirement has nothing to worry about - we have recovered from every previous crisis, and done much better at the end,” Pavlov says.

Somebody with five years to retirement, however, should be in fairly conservative portfolio, with some allocation to bonds, argues Pavlov, noting this allocation tends to help mitigate losses.

This bear market will eventually be history. Buying quality stocks during a recession or bear market can make sense, says Hagerman. She says that Warren Buffett in 2008 started buying as everyone was selling. “Fears regarding the long-term prosperity of the nation’s many sound companies make no sense,” Buffett said then.