Investing

What to Invest in During a Recession

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Recently, The Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA) expressed concerns about the nation’s economy, warning policymakers of an impending recession by the end of 2022, if necessary actions are not taken.

Recession usually doesn’t look good. Investopedia defines it as “a significant, widespread, and prolonged downturn in economic activity.” It is a period of time when many companies struggle to stay afloat, resulting in people losing their jobs. Nigeria’s “recession” situation tends to be a bit worse, as we frequently experience what we call “stagflation” – where our economic growth is slow, but we are recording extremely high levels of inflation.

Investing during a recession can be quite risky. But while you might be tempted to just put your money in some savings account, there are still some ways to invest in a period like this.

Assets that tend to perform well during recessions

As a general rule, it’s best to invest in assets that retain their value during a recession. These are some options that tend to stick around and even appreciate in value:

Dollar assets 

If Nigeria is experiencing a recession, the value of the naira will drop during this period because of a number of reasons. 

  1. Foreign investors reduce their investments in our country because of the weak economic environment 
  2. The CBN will attempt to reduce market interest rates, to make it easier for businesses to borrow, but doing this also makes Nigeria less attractive for foreign investments

As a result, these foreign investors will leave Nigeria and take away their dollars, reducing dollar liquidity and thus causing the naira to decline. With all these in mind, it’s important for you to have dollar assets during this period because it will appreciate. 

On Cowrywise, we have Eurobond Fund – a type of mutual fund that lets you invest in dollar assets. Learn more about how to invest in dollar mutual funds on Cowrywise.

Utility sector

Things like food, power, water supply, transport and even health care tend to be necessary purchases that consumers make regardless of the state of the economy. There will always be demand for these kinds of products. So they can be good sectors to invest in because they will always be needed by people even during economic downturns. They are also likely to outperform other kinds of stocks. Luckily, there are a lot of companies in this sector listed on the Nigerian Stock Exchange and you can purchase a stock. However, if you do not have the time, we have carefully curated mutual funds investment options from several top equity fund managers.

Learn more about how to invest in equity mutual funds.

Quality Stocks

Quality stocks are those that have a strong balance sheet, a consistent dividend history, and good management. The balance sheet provides a snapshot of all assets and liabilities owned by the company, as well as its cash flows over time. A quality stock will likely perform well during recessions as they tend to be less volatile than other stocks. You want to buy stocks of companies that have stood the test of time, have good operating cash flows and pay regular dividends. Some of these companies exist in the Nigerian banking sector, healthcare, agriculture and fast-moving consumer goods.

Gold

Gold is a safe investment. It’s also a good investment during recessions, as it can also hold its value in periods of economic turmoil and inflation. Precious metals like gold or silver coins (or bars) tend to maintain their value over time even when the economy is going through hard times. They also offer greater security than other investments because they can’t be easily manipulated by banks or traders. The Nigerian Stock Exchange has a security called the NewGold Exchange-traded Fund (ETF), which investors use to mirror the performance of the price of physical gold. Another option is antiques; their value typically doesn’t change much over time. 

Bonds

Bonds are much safer than stocks when an economy is experiencing a recession, so investors tend to reallocate most of their holdings in stocks to bonds, causing bond prices to rise. Also, because bonds give a fixed interest rate, they are good investments when the central bank is reducing interest rates to curb a recession. 

For instance, you purchase a bond that pays you a 15% annual coupon every year for 5 years, and then Nigeria enters a recession which leads the CBN to reduce interest rates to as low as 5% to improve business activity. Because you’ve already locked in 15% for 5 years, you’re good to go and not affected by the current market movements. 

Learn more about bonds.

During a recession, it’s important to invest in assets that retain their value despite economic downturns.

What to not invest in during a recession

The best investments during a recession are ones that you can touch and feel. This means that investing in some types of stocks (non-necessities), and real estate may not pay off. They may give you higher returns but their value typically decreases rapidly when the economy slows down. 

Is it safe to invest during a recession?

Investing during a recession is a risky proposition. However, there are ways to mitigate this risk:

  • Diversify your portfolio. It’s important not to put all of your eggs in one basket. Diversification will help protect against market downturns and ensure that if one asset class suffers, you’ll have others pulling up the weight of your investment strategy.
  • Invest in assets that retain their value or appreciate with time. Some investments hold up better than others during rough economic times (e.g. gold) while others don’t fare as well (e.g., stocks). Be sure to not only understand what type of investor you are but also do research on which types of investments would best suit your overall goals before committing any money to them!

Bottom line

Overall, investing during a recession is a risky move. It’s hard to predict what will happen. However, there are some sectors that tend to perform well during recessions and these should be your first stop when looking for investment opportunities. Mutual funds can provide some stability as well by spreading out the risk across multiple industries so that if one investment drops too far during a downturn, it won’t ruin your entire portfolio.

Got questions or thoughts? Please share with us in the comments.

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