Stocks in recession – quality is a good idea

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by Michael Thaler, CEO of Top Vermögen in Starnberg

Before we delve into investing opportunities during recessionary periods, it’s important to take a good look at what a recession is. A technical recession is defined as two consecutive quarters of declining GDP growth. Beyond the theoretical definition, simply put, a recession means that overall economic growth is declining. Some sectors can continue to grow while others contract – but the overall level of economic activity falls during a recession. Recessions are caused by a drop in investment and spending.

There can be several reasons for this: For example, consumers can be overindebted, company valuations or unemployment and inflation can be too high. From a company’s point of view, costs must be reduced or the products must be adapted to changing customer needs so that crisis situations can be successfully overcome. An economic downturn typically results in lower profits for many of the leading companies. For this reason, the expectation of a recession is enough to trigger a correction on the capital markets. Therefore, recessions can also be challenging for investors. The portfolios of younger investors in particular, who have seen only rising share prices in recent decades – especially in the technology sector – are being put to the emotional test for the first time.

So how should investors position themselves during a recession?

First of all, don’t lose faith. It may seem tempting to sell everything in a recession when sentiment is depressed. While investors fear these economic downturns, they can also create some of the best buying opportunities. The great recession of 2008 seemed like the end of the world to many investors. But it was the buying opportunity of a lifetime, as it preceded a decade-long bull market. Because great fortunes are created in a crisis.

For a number of reasons, recessions can present great buying opportunities for investors. In difficult economic times, high-quality stocks are available at a special price, so to speak. And as the saying goes: The profit lies in the purchase! However, investors should meet a few basic requirements in order to be able to take full advantage of these buying opportunities. You have created a sufficient financial cushion and do not need the invested assets to make a living. In addition, you should have an investment horizon that is longer than five years. Finally, you need nerves of steel, because it takes a lot of courage to invest exactly when the world is going under in the media.

In times of economic uncertainty, quality stocks are your best bet as they exhibit a number of strengths. Quality companies are characterized by stable business models and a strong market position. The companies should have a dominant position within their industry with a strong brand and product portfolio. For this reason, they tend to generate higher margins and get by with little debt. This combination makes it easier to absorb economic downturns and the chances of quick recoveries are comparatively high. So if investors want to invest in a recession, they should look for quality stocks.

A good example is the data supplier Fair Isaac from the USA. The company generates its sales with the so-called FICO Score, a creditworthiness check for credit card issuers, insurers and banks. In return, regular license fees are due for customers – a so-called subscription model that promises recurring sales. In addition, it is difficult for the competition to oust Fair Isaac from its position, as the company has had a solid footing with its customers for many years.

A more prominent example, also from the USA, is Alphabet. The parent company behind Google is still unparalleled in the field of search engines and it is impossible to imagine our lives without Google, YouTube or Android. The outstanding market position is also reflected in the very low level of debt and comparatively high profitability. The stock is currently trading at its lowest price-to-earnings ratio in 10 years.

However, not everything should be put on one card here either. Basically, there are two rules to follow. Rule No. 1 No one can predict the future with sufficient accuracy! Therefore, the prices can continue to fall after the time of the investment. In practice, investors can protect themselves from this by making a piecemeal investment in several tranches. Rule #2 never put all your eggs in one basket. Spreading the investment over several stocks from different regions and sectors reduces the portfolio’s susceptibility to fluctuations.

More and more private investors in Germany trust in bank-independent asset managers when investing their money. Free from product and sales interests, they can advise their clients in the best possible way. You can find more information at www.v-bank.com.

The above text reflects the opinion of the respective columnist. finanzen.net GmbH assumes no responsibility for its correctness and excludes any claims for recourse.