The opportunities in a recession

Are we already in recession? The answer depends on who you ask. But the general feeling in global financial markets appears to be that either way, we must gird up for the inevitable recessionary environment wrought by the devastating social and economic impact of the ongoing coronavirus pandemic.

Bank of America is warning we are already in recession, while Royal Bank of Canada has claimed a coronavirus-driven recession in 2020 is a certainty. The recent surprise interest rate cuts both by the U.S. Federal Reserve and the Bank of Canada won’t prevent it.

The virus has forced countries to lockdown, killed the longest bull market rally in history, and wiped out trillions of dollars in lost productivity, health care expenses and in unrelenting stock market crashes. Worse yet, no one can predict the end of coronavirus calamity and its incalculably high economic cost.

How bad is it going to be?
How deep this recession could be and how long the recovery would take is a matter of speculation at this point. Morningstar health strategist Karen Andersen says this recession will be different from the post-2008 Great Recession and while 2020 looks bad, coronavirus-induced recession won’t cause a long-term GDP loss.

The recession will be deep but short, because it’s triggered by an unexpected shock rather than any imbalances in the economy, says Nigel Green, the chief executive and founder of deVere Group, one of the world’s largest independent financial advisory organisations.

However, every recession produces a new world, and so will this one, he adds. “A Covid-19 recession is likely to fundamentally shift how we live, do business and invest,” says Green, pointing out “we’re moving towards an era of negative interest rates.”

The second cut of rates, now at zero, by the Federal Reserve – the world’s de facto central bank – suggests that the U.S. could soon follow Europe and Japan by adopting negative interest rates. “Zero or negative rates will help boost financial asset prices and savvy investors will be seeking to top-up their portfolios by drip-feeding new money into the market at this time,” says Green, noting lower rates “will give more investors reason to increase their exposure to equities as the money won’t be working for them as cash deposits.”

So what can you do to prepare for this new world?

How to prepare for recession?
It may already be a bit late for that, says Andrey Pavlov, professor of finance, Beedie School of Business, Simon Fraser University. “Financial markets are forward-looking, and prices have already adjusted to the reality of recession in the short-run,” he says. Now is the time to use the lower asset prices to create a comfortable portfolio with a mixture of stocks and bonds appropriate for the long-term, he says.

The best way to prepare for the unknown is to always have cash on hand, says Mary Hagerman, a portfolio manager with Raymond James. “Typically, for at least two years of living expenses in order to avoid having to sell investments should the markets retreat,” says Hagerman.

Gordon Pape, editor and Publisher of the Internet Wealth Builder and Income Investor newsletters says that the time to start deploying cash will be when the market rebounds 20% from its low, a signal that a new bull [market] may be underway.

But deploy where?

Every recession produces new opportunities
Investors should be revising their portfolios to mitigate risk, but they should also take advantage of the new opportunities that all crises inevitably spawn. When the tide goes out, new industries will emerge.

“The coronavirus outbreak can be expected to speed up the so-called Fourth Revolution, which is fuelled by new technologies, such as Artificial Intelligence and mobile supercomputing,” says Green.

Investors also need to position themselves for new opportunities such as technologies that enable working remotely. “We are also starting to interact remotely in our social lives even more, so any technology that helps with this - not just video conferencing, but virtual reality for meetings and gatherings, would become even more important,” says Pavlov.

The companies that survive, even thrive, during these times will likely attract investor attention. “Even if technology stocks looked expensive prior to this outbreak, technology is what is helping us work from home, order groceries online and watch movies while we self-isolate,” says Hagerman. “Technology may continue to dominate and there will be many more new business ideas coming from this sector.”

What should investors do?
We strongly advise against trying to time the market. All crises end. This will, too. To draw from the 2008 financial crisis, investors who didn’t panic-sell were richly rewarded when the stock market rebounded.

At the portfolio level, it is important that allocations reflect the investor’s time horizon. “Somebody with 20 years to retirement has nothing to worry about - we have recovered from every previous crisis, and done much better at the end,” Pavlov assures.

Somebody with five years to retirement, however, should be in fairly conservative portfolio, with some allocation to bonds, argues Pavlov, noting this allocation tends to help mitigate losses, as “bonds do very well when interest rates are falling.”

Ride out the storm
Even the best companies get hit when the entire market collapses. But when the bloodbath ends, companies with strong fundamentals will roar back to new highs as the 2009 financial crisis showed.

The bear market will eventually be history. Buying quality stocks during a recession or bear market can make sense, says Hagerman. To drive her point home, she invokes Warren Buffett who in 2008 started buying as everyone was selling. “Fears regarding the long-term prosperity of the nation’s many sound companies make no sense,” Buffett famously said then.

The same holds true for the current crisis.