Where to invest your money during a recession

Offshore assets would be recession proof, but be wary of currency fluctuations.
Picture: Shutterstock

South Africa’s economy is officially in a recession with gross domestic product (GDP) contracting by 0.7% in the first quarter of 2017 from a 0.3% contraction in the previous quarter. The economic downturn has made people more aware of managing their money and investments carefully. Fortunately for investors, there are other asset classes that perform better during economic uncertainties. Jo-Anne Bailey, sales director and country manager for Africa at Franklin Templeton, explores the implications of a recession on personal finance and wealth creation.

A good starting point would be to outline what a recession means for someone’s asset and investment composition? 

Jo-Anne Bailey (JB): Technically a recession is defined as two consecutive quarters of declining real economic growth in a country. Declining growth would typically negatively impact the earnings of local companies, including those listed on a stock exchange. It will also have an impact on listed property and fixed-income assets as there are interest rate and inflation implications. Recessions are also generally coupled with a loss of confidence in the economy and can exacerbate negative impacts. Typically, markets are forward looking and will price in some of the recessionary impacts on the economy by discounting those assets that will be negatively affected in a recession.

Certain assets which act as relative safe havens such as fixed-income products tend to outperform as a recession suggests lower interest rates and fixed income assets tend to rise in that environment holding other factors such as politics and downgrades constant. The average investor will see a stronger decline in his investments if he is more exposed to local equities. The extent of diversification will dictate how serious the impact is; usually, well-diversified investment portfolios that include some offshore exposure should be less impacted by a local recession. Assets such as fixed residential property can face declines if a recession continues for an extended period, but usually, the impact is subdued compared to local equities.

Investors might think that a recession is an exogenous factor that doesn’t have an impact on their investments, wealth creation and preservation. Is this view far off the mark?

JB: Recessions do impact investments as explained above and the consequences can become more serious on wealth creation and preservation when investors panic and make short-term decisions outside of a sensible long-term investment plan. Short-sighted investors are likely to make hasty decisions such as selling into a decline only to miss the general upside that comes when a recession ends.

Is it prudent for investors to reassess their investment strategies during an economic recession or employ a wait-and-see approach to avoid panic?

JB: Investors should reassess their investment strategies at regular intervals as part of long-term planning, irrespective of whether there is a recession or not. Typically, a long-term plan would cater to the vagaries of the markets by having diversification and not being overly concentrated to the impact of a recession. In this manner, clients will have less reason to panic and can even take advantage of opportunities that may present themselves in a recession.

How often should one embark on reassessing their investments during a recession?

JB: It is sensible to review your investment plan at least once a year or sooner if the personal factors that went into formulating that plan have changed. Recessions typically bring some volatility to investment portfolios, so reviewing it more closely during a recession will be needed, but one should always put this in context of the long-term investment plan that was based on looking through market cycles for risk-adjusted returns to meet long-term goals and needs.

What should an investment strategy look like during a recession and be adjusted for risk?

JB: It really should not look much different; the investment strategy is based on combining asset classes that can provide risk-adjusted returns through markets cycles to meet long-term goals. During a recession, this focus should remain in place. Any adjustments that are being made are because the recession may have highlighted concentration risk that needs to be addressed and is likely to cause a distraction from meeting long-term goals.

Are there asset classes that are recession proof and that one should be invested in?

JB: Offshore assets would be recession proof as the local recession should not have an impact. Commodity assets would not have a correlation with a local recession, but they have their own dynamics and can be quite volatile on their own. Locally, in absolute terms, cash assets would be recession proof from a capital point of view but the income would not be if interest rates had to fall. However, in the long term cash assets generally provide the lowest returns and are not good inflation hedges, they also can attract higher taxes vs dividends and capital gains. Fixed income assets can move counter to equities in a recession, but there a host of other factors that dictate those returns, please see my first response for more detail on how those are affected.

Which are the investment classes that might not be the best option to invest in during a recession?

JB: Local equities would have more of an immediate impact from the recession, but as noted before the market is forward looking and hence the prices of those assets would have faced some decline already. We don’t recommend timing the markets, hence any good investment strategy will have a combination of various asset classes to ride through market cycles and diversify away from concentrated negative impacts.

What about personal finance during a recession: is it a good time to take up more debt or is it prudent to pay off debt?

JB: Paying off debt is generally the prudent thing to do; however, note it is based on individual circumstances and should be part of the investment strategy and something one’s financial advisor can give tailored advice on.

When there’s increasing economic and political uncertainty, offshore investments do become in vogue among investors. Is it a good time to go offshore?

JB: Any time is a good time to invest offshore as long as investors are prepared to be patient. We don’t think investors should look to time the markets, but instead invest both in domestic and overseas markets regularly and in a systematic manner. Equity investments warrant a longer investment horizon and we recommend investors come in with a horizon of 3–5 years or longer.

What should an investor consider first before investing in offshore markets?

JB: Investors are often wary of the impact of currency fluctuations on real returns. An often-asked question is whether to hedge currency risk when investing internationally. Currency movements impact returns on international investments over the short term, but over the medium term, the real exchange currency rates tend to revert to the mean and to that extent act as a natural hedge. Investors should also consider tax implications, general economic and political conditions and transaction costs while investing internationally. Fortunately, these challenges can be overcome if investors consult an experienced advisor who can guide them on investment opportunities and participate in the global growth story through mutual funds.

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I thought there was NO money to invest during a recession – that’s why its a recession!

Dear Robert, you are confusing economic recession with economic depression. Please ask the technical college for a refund of your class fees.

well there you go – and I always thought a recession was when yr neighbour lost his job and a depression was when YOU lost your job! with half the country unemployed AND rising – that’s where methinks yr country is!

End of comments.

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