A recession during the downturn of an economy certainly brings on hard times for people all around. It may become difficult to look for alternative investments during a time of recession. Are you looking for secure investment options in a period of financial recession? The following article explores the basics of recession while listing a few sectors that are impacted the most at the time of recession. Read on to know more.
What is Financial Recession?
Let us explore the basics of financial recession before we proceed. In its essence, a recession is a lengthy decrease in the economy. A recession is confirmed when an economy experiences a negative GDP or gross domestic product for two quarters back to back. The economic cycle is extremely prone to fluctuation. And a decrease in output results in an increase in the unemployment rate. An inversely proportional relationship, if you may. Moreover, recession causes a burden on businesses and the livelihood of common people. Most economies report a recession for a period of 7-10 years.
However, a recession is measured differently by various private entities. For instance, according to NBER or the National Bureau of Economic Research of the United States, it is measured via a tenure of fluctuation (highs and lows) in a business cycle. They do not merely depend on GDP as one of the indicating factors but also consider retail sales, nonfarm payrolls, etc.
The Impact of Financial Recession
Recession causes an astounding amount of impact on the employment rate of an economy which in turn affects the households. These layoffs hit the low-skilled workers the highest. One of the most common effects of recession is bankruptcies and failures of businesses (big or small) to keep up with the fluctuating economy. While bigger, Fortune 500 businesses mostly cope with recession by means of layoffs, smaller businesses experience cash flow problems as the clients are unable to pay them at the required time, making it hard to keep up with the day-to-day activities. It is important to note that small businesses are more prone to bankruptcies and shutdowns due to recession as clients refuse to invest in a business that does not contain a stable cash flow and has a liquid foundation.
What steps does the government take to curb the recession? They participate in high expenditure along with tax sops in order to implement a fiscal stimulus.
Sectors to Avoid During a Financial Recession
Although recession impacts the various sectors differently, some are impacted more than others. Following is the list of sectors to steer clear of while investing at the time of a financial recession:
1. Real Estate
Industries that are dependent on direct consumer spending or require a high amount of capital tend to face the most turmoil during a recession. Unfortunately, real estate holds true to both situations, which was evident from the recession of 2008 with the crash of the housing market. Therefore, the liquidity that comes with real estate is too risky to get involved with at a time of recession. Construction, due to its high supply demand, also falls under this category
Households and the common people cope with the recession by cutting down on unnecessary expenses. Therefore, many retail stores and businesses are specifically hit by this downturn. The low demand in the market inevitably hurts retailers in more ways than one.
3. High Yield Bonds
The high yield bonds are essentially corporate debt securities that have a high-interest rate as compared to investment-grade bonds. These bonds are extremely high risk at times of recession as they pertain to low credit ratings. The companies that issue these bonds are usually in debt and extremely susceptible to fluctuations.
4. Penny Stocks
Penny stocks are high-risk reward investments that are traded at alarmingly low prices. They provide very little transparency and are typically not even listed on main stock exchanges. Therefore, they are considered speculative and are steered clear by smart investors during the recession.
5. Travel and Tourism
In 2020, the number of air travelers decreased by a whooping amount of 95%. Experts still don’t know when the pre covid numbers might return to normal. This only goes on to show how much of an impact tourism and travel businesses partake in when it comes to the recession or any downturn in the market.
6. Industrial Sector
Much like real estate, the manufacturing sector also requires a lot of capital in order to continue its operations. This capital is hard to come by in times of economic turmoils and market fluctuations, which is why they experience a blowback during the recession. Due to its high supply demand, construction also falls under this category.
7. Leisure and Hospitality
At times when an economy is facing a downturn, and people are cutting back their expenses, the leisure and hospitality sector experiences a major blowback with many shutdowns of theatres and other entertainment sectors. This is because, although this aforementioned sector increases the quality of life, they are not exactly necessary in order to survive.
8. Financial Institutions
During the recession, consumers’ credits are difficult to increase due to the downturn in economic activities. Therefore, industries that provide loans, such as the banking sector or other insurance companies, suffer a loss due to the decrease in demand for loans.
9. Energy Sector
At the time of a recession, the energy sector is vulnerable because of a decrease in demand for products. Since the economy slows down, the consumption of energy also experiences a decrease. Therefore, companies operating in the energy sector generate low revenue during a recession.
10. Consumer Discretionary
The industries that provide goods that fall under the luxury or larger-than-life category, which are not needed for survival, suffer a loss due to the decrease in demand from the general public because of the rising unemployment rates and the households facing a decrease in cash flow due to recession.
Therefore, before investing, an individual needs to look out for factors that might affect their potential investment. Financial recession is borderline inevitable in any functional economy. There are steps the government can take to curb the said recession, but even then, it will inevitably impact businesses and sectors. Given above is the list of some sectors to steer clear of while investing in a recession. Want to know more about investment and alternative investments and have your quotes answered? Head on to the Bhive workspace to learn more.