With a recession widely expected before the end of the year, including by the Bank of England, I have been thinking about ways in which I could position my portfolio. Can I find some recession-proof shares, for example?
Recently, Invezz has shared five tips on handling the rising cost of living with “recession-proof investments”. I think some of these tips are good advice no matter what is going on in the wider economy, such as only investing money you can afford and using diversification to reduce risks. But it was another of the Invezz tips that most caught my eye: “look into stocks that are ‘protected’ from market volatility”.
Clearly there are some businesses where customer demand is constant in good times and bad.
Invezz gives as examples consumer staples, grocery stores, alcoholic beverage manufacturers, cosmetics, and healthcare. However, perhaps some of those businesses may still be affected by a recession. For example, while some healthcare spending continues in good times and bad, other expenditure is more linked to the state of the economy. This discretionary healthcare could be scaled back in a recession.
But some areas look more likely to me to see strong demand even in a recession. For example, the addictive nature of smoking means that cigarette sales tend to do well regardless of whether there is a recession. The long-term declining trend may continue, but there is little immediate impact just because of a recession. That is one reason I own shares in cigarette makers like British American Tobacco and Altria.
But just because demand is constant does not really make a business “recession-proof”. One part of the equation is sales, which could stay strong. But the other side is costs. If a recession pushes up costs for a company, it could make lower profits even if demand stays strong. High inflation is a key risk I see eating into the profit margins of companies such as consumer goods makers.
But is a recession-proof business the same thing as recession-proof shares?
I do not think so. Share prices reflect different investors’ views of what a business is worth. Before a recession, for example, they may pile into a defensive sector like tobacco. That helps explain why in the past year, British American Tobacco shares are up 21% and UK rival Imperial Brands has seen a 16% increase. But once the economy recovers, some investors may move out of such defensive sectors. That could push share prices down whatever the business results.
So whether a company is actually recession-proof or simply well-positioned to handle a recession, that does not mean its shares will necessarily perform well across a recession.
Still, the idea of recession-proof shares definitely strikes me as thought-provoking.
If its business model allows a firm to maintain sales in all economic conditions, that could be the basis of profitability for years or even decades. From my long-term investing perspective, such businesses would definitely grab my attention regardless of whether there is a recession or not. On its own, a great business is not enough to make me invest, though. I would also look at whether the share price seemed reasonable.
This August, I will be looking for shares that could do well in a recession – or a boom.
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C Ruane has positions in Altria, British American Tobacco and Imperial Brands. The Motley Fool UK has recommended British American Tobacco and Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.