Beforehand, it seems that we likely have just entered into a recession.
What is a recession?
As per Wikipedia definition: “In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various events, such as a financial crisis, an external trade shock, an adverse supply shock, the bursting of an economic bubble, or a large-scale natural or anthropogenic disaster (e.g. a pandemic)” …
“A severe (GDP down by 10%) or prolonged (three or four years) recession is referred to as an economic depression, although some argue that their causes and cures can be different. As an informal shorthand, economists sometimes refer to different recession shapes, such as V-shaped, U-shaped, L-shaped and W-shaped recessions.”
Do You still need to invest?
Even though You’re worried about the recession and its W-, V-, U- or L- shapes, yet You are aware that You still should invest and be in the market.
Definitely … YES!!! Here is how to position Your portfolio.
No doubt that recessions are usually scary times for the markets, businesses and individuals. Moreover, this is an unusual recession. Since the current recession has been caused by a pandemic, and not an asset bubble bursting, with hefty government action to combat the economic fallout.
BUT …
Experts insights, analysis and smart data help in cutting through the noise to spot risks and opportunities. That can easily show You to which extend recessions can be a great time to pick up shares of companies with compelling long-term growth stories.
Now that You have acquired the basics to invest in Stocks, let’s get into more details of building up a recession-resistant portfolio.
Why would I advocate looking at growth stocks in a recession, even at those which tend sometimes to trade at higher valuations?
A couple of reasons:
- When growth becomes scarce in a recession, companies that can still grow get premium valuations;
- Companies that are able to grow are largely in the midst of big, long-term technology trends that provide more efficient ways of doing business. These innovations are currently getting accelerated by the stay-at-home economy as businesses feel the need to digitize and automate their businesses. Those types of businesses can actually grow stronger for the long-term in a recession.
Great opportunities to look at today are innovative cloud software stocks, many of which have not only held up well in the coronavirus recession, but have actually increased in value in 2020.
These include stocks like Twilio, which provides cloud-based communications services to enterprise clients. With so many businesses losing their ability to physically interface with customers, Twilio has seen a demand surge as companies look to mobile and email messages to inform and keep up with customers.
Another high-growth stock is Datadog, which monitors cloud usage and provides valuable analytics to its corporate customers.
A third example is Teladoc Health, which enables people to speak with doctors remotely, rather than having to go into a physical office. Unsurprisingly, it is booming.
If You fear a long recession, be on the lookout for similar stocks with recurring revenues, strong growth profiles, and products that help companies deal with the recession at hand. While seemingly “expensive,” strong revenue growth should provide a rational for these names through the downturn, and upside on the other side.
To sum up: Three elements to build up Your recession-proof portfolio
In closing, a recession-resistant portfolio should have:
– a mix of stable consumer staples and utilities stocks,
– stocks of companies with cash-rich balance sheets, and
– innovative young focused growth companies that provide new, more efficient ways of doing business.
If You construct a portfolio with these three elements and avoid highly indebted, cyclical, or no-growth companies, Your portfolio should hold up fine through even a long recession.