What is a Good Investment During Recession?
Recession is associated to a weak economy where the demands for goods and services decline resulting to lower prices. Drop in the stock market and increase in unemployment rate are among the few indicators of recession.
The ongoing failure of the US Subprime Lending market is threatening the US and the global economy as a whole to collapse. Subprime lending generally involves extending loans to borrowers with poor credit history at a higher interest rate than the market rate. The increases in the interest rates increased the default rates of the subprime loans causing subprime lenders to file bankruptcy. The securitisation of subprime loans into marketable securities such as mortgage backed securities (MBS) has magnified the impact of the subprime mortgage crisis to the investors of MBS’s not only in the US but also in the whole world market triggering recession of the world economy.
Invesment strategy during recession is a tough challenge. The following are the few investments generally acceptable in a falling economy:
1. Gold - Generally a good protection against inflation and the effect of the credit crisis. However, price of gold at the moment is very high so the return might not be that great.
2. Money market instruments - The traditional term deposit accounts with highly established financial institutions at least guarantee a fixed return of investment. In Australia, you can get as high as 8.5% interest from BankWest!
3. Government bonds - This is another area where an investor is guaranteed a cash flow return. However, if the recession extends for a long period of time the possible increase in interest rates will decrease the value of the bonds realising a huge capital loss!
4. Stock market - This should be the last option to consider in investing during recession! Extra care must be exercised in selecting stocks that are non-cyclical, meaning those companies that are not heavily impacted by the weakening economy. In general, invest in companies whose products are necessities that people keep on buying such as consumer goods (e.g. food items and groceries) and utilities (e.g. oil and gas). Short selling of cyclical stocks (e.g. real estate, banking) is also a good investment strategy.
Government, on the other hand, normally interferes to combat the effect of recession. Tax cuts, increases in goverment spending and lowering of the interest rates by the Central Bank are among the common responses of the government. Finally, the benefit of diversification should still not to be understated during recession.
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McDonalds is a good example of a counter cyclical equity investment. Plus, it tastes great!
If only you had posted this 2 months ago!!
McDonalds is unhealthy!! I go for Jollibee instead!
[...] What is a Good Investment During Recession? [...]
Is Wilson really some sort of hero vigilant by night?
A Pink Knight if you will?
I came across this blog the other day and you got some great info here - thanks.
As promised, I am leaving you a comment….
Man all your entries are so…..complicated to understand….I feel like I am reading a textbook LOL
How’s Sydney?? is MH bullying you? LOL
I might be going to site on Wednesday!! Dont want to go!
Hi JZ - At last you dropped by!! Thanks.. hehe
Sydney minus the work is great! We’ve been working long hours almost everyday and even during weekends. Very depressing. I’m looking forward of going back to Perth this weekend!
Have fun when you go to the mine site. I’ve heard that the people over there are mostly men who don’t see women very often. So be careful too. Hopefully you can find the rich cantonese speaking guy that you’re searching for!