Last updated August 23rd, 2019.
Recessions strike the international economy once few years – and plenty more will happen in the future. That’s a certainty.
There were 10 recessions between 1945 and 2001. On average, that equates to one recession every five and a half years.
It’s now been more than a decade since the Global Financial Crisis of 2008. As comparison, the longest bull-market in modern history, besides the one we’re in right now, only lasted 7 years.
Hence, you could easily argue that we’re long overdue for yet another global downturn.
I’m not saying we’re going to see a recession this year. Or even next. But a crash could happen abruptly and with very little warning. Because of this, it’s crucial for investors to at least have a “game plan” ready for the inevitable downturn.
A wise investor should be diversified and prepared for anything. With that said, here are five of the best performing investments in a recession.
1. Frontier Markets
Frontier markets are less developed nations. We’re not talking about countries like Thailand or China – those are emerging markets. Frontier markets are places like Myanmar, the Philippines, and Mongolia.
Why do frontier markets perform well during recessions? Because they aren’t as reliant on the global economy, and thus are less vulnerable to its weaknesses.
See, our world is now interconnected. Starbucks and KFC can be found in almost every country on the planet. Most global growth depends on continued investment from multinational firms because of this.
As a result, the entire world gets sick when the US, China, or any other large economy enters a recession and their businesses can no longer afford to expand abroad.
Yet frontier markets can be exceptions. Laos doesn’t depend on Burger King opening up more stores. Burger King isn’t even operating in the country right now.
That’s the reason why frontier market investments are usually best to hold during a recession.
2. Rental Property
I should clarify on this one. Not all real estate markets perform well in a recession. Property in places like California plummeted over 50% during the last major economic downturn in 2008, in fact.
There are countless real estate markets in the world though. From Bangkok to Bogota, every city has its own fundamentals, market dynamics, and future prospects.
For the purpose of recession-proofing your portfolio, we will want to find the most affordable markets. One way to figure out whether a market is affordable is to divide the average home price by average annual income in a particular city.
This calculation will tell you how affordable any housing market is. For example, if the average home price is $100,000 and average income is $10,000, it means the average local must work ten years to buy a property.
A number below 10 is ideal. Within this range, real estate values are unlikely to drop even if a recession strikes. Property will also generate rental income in the meantime – something that gold won’t do.
3. Defensive Stocks
The vast majority of stocks will depreciate in value during an economic downturn. Falling asset prices are the whole point of a recession, after all.
However, a select few companies in some sectors are known to remain strong during times of crisis. There are stocks which tend to perform better in a recession than outside of one as well.
Such firms are often in the business of selling consumer staples – goods that consumers must buy regardless of economic conditions. For example, people still purchase the same amount of toothpaste, toilet paper, and soap in a recession. Cars and televisions? Not so much.
Companies selling cheaper substitute products also hold their own in a recession. McDonald’s and Nissin Ramen are two great examples. Sales of instant noodles and fast food always boom in harsh times.
Of course, people still have to eat during a recession. Yet consumers will shift their preferences to the cheapest available option.
The end result is that Subway enjoys greater profit at the expense of your local Italian deli. But either way, defensive stocks are some of the best investments for a recession.
The performance of Nissin (TYO:2897), the world’s largest maker of instant noodles, since 2008. Inexpensive food like ramen sells even better during a recession.
Okay, so cash isn’t really an investment. It doesn’t appreciate in value, barely pays interest (if at all), and is vulnerable to inflation. Those things are true whether your cash is stored in a bank account or under your mattress.
Holding cash lets you position yourself for a buyers’ market though. Anyone with spare cash in an economic downturn can buy assets at low prices.
You’re able to swoop in, purchase heavily discounted stocks and property at the bottom of the market, and wait for better times.
It’s better to hold several different currencies. Try mixing things up instead of owning a bunch of U.S. Dollars or Euros. Again, the goal is reducing your dependence on any single country or stock market.
The Singapore Dollar, Swiss Franc, Thai Baht and several other currencies have solid histories of performance. Diversifying your portfolio is critical whether we are talking about equities or currencies.
You might also be interested in reading another article about the currencies in Asia that we’re bullish on. They should perform better than most during the next recession.
5. Paying Off Debt
Again, paying off your debt isn’t truly an investment. But it’s hard to understate the importance of not having to pay off credit cards and loans in a recession.
Recessions are the absolute worst times to owe people money. Especially at very high interest rates exceeding 20%, which is often the case with credit card debt.
Your cash flow is reduced by having to make monthly payments – let alone at interest rates in the double digit percentage range.
More importantly, there’s an opportunity cost. The money you’re using to pay off debt could be invested at the bottom of the market instead.
You could be making profit with other assets on this list rather than paying loans and interest.
Why Are These the Best Investments for a Recession?
It might sound absurd, but people often forget the whole point of investing is to “buy-low, sell high”.
As such, and contrary to popular belief, periods of economic downturn can be the best times to invest. You just need to prepare for future scenarios and choose the top performing assets in a recession.
The five investments above all have one thing in common: they’re capable of generating strong returns no matter what happens.
Buying property will generate rental yields. Defensive stocks often rise regardless of economic conditions. Meanwhile, even holding cash in strong currencies will pay off in the future if your timing is appropriate.
Simply put: the best investments in a recession are either less correlated with global markets, will guarantee you cash flow, or involve great timing.
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