The UKís financial markets remain in a state of flux at present, with investors having fled British-based funds in recent weeks and pulled more than £1 billion from the market as the region enters a technical recession.
This is a trend thatís also prevalent throughout the western world, with an October survey for the National Association of Business Economics revealing that the majority of respondents expected the US to enter a recession in the next 12 months.
Despite this and the urge of risk-averse traders to abandon the market as recession hits, there are ways of investing in a depreciating economic climate. There are also steps that you can take to minimise the risk of loss and optimise returns, including the following:
Set Your Investment Goals During a Recession
While economic and market conditions may change during a recession, the universal and underlying laws that dictate best investment practice remain the same.
So, the first step towards investing during a recession is to identify and clarify your investment goals, while establishing timeframes in which to achieve these and setting viable metrics.
For example, are you looking to minimise your exposure to risk during a recession and create a portfolio that protects your capital from market and price fluctuations? Or, are you keen on maximising long-term gains through specific investment vehicles, such as buying and holding targeted equities?
Alternatively, you may want to create a fixed source of income through your investment portfolio, or simply Ďbuy the dipí and leverage market volatility with a view to accessing short-term gains as the economy begins to recover.
Of course, the ideal scenario is to incorporate all of these goals and strategies into your portfolio management, but this is incredibly hard to achieve. So, youíll need to consider, clarify and prioritise your goals, before using these self-imposed boundaries to target specific markets and asset classes.
Consider Speculative Investments
If you do decide to focus on optimising long-term gains through the process of buying and holding devalued stocks (that will subsequently appreciate during a period of economic recovery), the only issue here is that your real-time returns are likely to suffer in the meantime.
This is why you shouldnít overlook the importance of holding a diverse portfolio during a recession, as this enables you to invest a small amount of your capital into speculative and short-term investment vehicles that can yield returns in a relatively short space of time.
You could consider investing in forex, for example, which involves the buying, selling and exchanging of international currencies.†
These are speculative assets that are traded in pairs, and while the market remains incredibly volatile, itís possible to deploy short-term trading strategies that leverage even momentary price fluctuations.
If you are going to trade forex during a recession, focus on major pairs that include the US dollar (which boast the highest levels of liquidity and flexibility), while ensuring that only a nominal amount of capital is initially committed to this market.
Itís also important to utilise automated risk management tools, including stop loss orders. These are used by traders to limit the loss or lock in a profit on an open position, automatically closing these once theyíve reached a predetermined level.
For example, your stop loss order may close a position once it has incurred a predetermined level of loss, safeguarding your capital and minimising your exposure to risk in an uncertain marketplace.
Consider the Sectors and Assets That Overperform During a Recession
As we can see from the forex market, itís apparent that not all sectors and asset classes react the same to periods of recession, with speculative investments allowing you to leverage market volatility to your advantage.
Conversely, assets such as gold are widely traded during a recession, as this precious metal has historically seen its value rise when economies contract.†
This is because demand for gold tends to increase among investors, who want to seek out secure stores of wealth that can sustain them for as long as a recession continues.
If you like to trade stocks, there are also a number of industries and sectors that tend to perform well during a recession. These include communication services and financials, which tend to remain strong regarding the prevailing economic or market conditions.
As weíve seen, energy stocks have also surged through 2022 so far, driven largely by significant rises in wholesale gas prices and supply chain issues as a result of Russiaís invasion of Ukraine.
This trend was sustained in November, while inflated gas prices alone were enough to push the FTSE 100 to a two-month high despite the wider economic climate and projections that the UK economy would shrink by 0.4% through 2023.
This highlights how itís possible to derive profits during a recession, so long as youíre willing to research the marketís trends and adjust your portfolio accordingly.