Last updated October 26th, 2018.
Recessions strike the global economy once every several years – and plenty more are sure to 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 almost a decade since the Global Financial Crisis of 2008. The longest bull-market in modern history, besides the one we’re in right now, only lasted 7 years.
As such, it could be argued that we’re long overdue for another recession.
I’m not saying we’re going to see one this year, or even next. But a crash can happen abruptly and with 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. With that said, here’s 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 China or Thailand – those are emerging markets. Frontier markets are places like Myanmar, Laos, 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 nations’ 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 recession and their businesses can no longer afford to expand abroad.
But frontier markets can be exceptions. Laos doesn’t depend on Burger King opening up more stores because Burger King isn’t even in the country yet.
This is the reason why frontier market investments are usually great 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 by over 50% during the last major economic downturn in 2008, in fact.
There’s countless different real estate markets in the world though. From Bangkok to Bogota, each city has its own fundamentals, market dynamics, and future prospects.
For the purpose of recession-proofing your portfolio, we 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 a 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, property values are unlikely to drop even if a recession strikes. Real estate will also generate rental income in the meantime – something gold won’t do.
3. Defensive Stocks
The vast majority of stocks depreciate in value during an economic downturn. Falling asset prices are sort of the point of a recession, after all.
However, a select few companies in some sectors are known to stay strong in times of crisis. There are even stocks which tend to perform better during a recession than outside of one.
Such firms are often in the business of selling consumer staples – products people need to buy regardless of economic conditions. For example, people still buy 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 boom during harsh times.
Of course, people still need to eat during a recession. But consumers will shift their preferences to the cheapest option possible.
The result is that Subway makes money at the expense of your local Italian deli.
The performance of Nissin (TYO:2897), the world’s largest maker of instant noodles, since 2008. Inexpensive food such as 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. These things are true whether the cash is stored in a bank account or under your mattress.
Holding cash lets you position yourself for a buyers’ market though. Those who have 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 best to hold several different currencies. Try mixing it up rather than owning a bunch of U.S. Dollars or Euros. Again, the goal is to reduce your dependence on a single country or stock market
The Singapore Dollar, Swiss Franc, Thai Baht and several other currencies all have a solid history of performance. It’s crucial to diversify your portfolio whether we’re talking about stocks or currencies.
You might also be interested in our article about the currencies in Asia we’re bullish on.
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 during a recession.
Recessions are the absolute worst times to owe people money. Especially at high interest rates, 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 + 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 best investments for a recession.
The five investments above all have one thing in common: they’re capable of generating strong returns no matter what happens.
Buying real estate generates rental yields. Defensive stocks often rise regardless of economic conditions. Meanwhile, even holding cash will pay off in the future if your timing is appropriate.
The best investments in a recession are either uncorrelated with the global economy, will guarantee you cash flow, or involve great timing.
Skip the Next Western Recession
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