The advent of a recession often brings trouble for many investors. There are many situations that cause the economy to contract, due to which markets fall and risky assets lose values. As per Kavan Choksi, during such times, experienced investors ideally rotate into recession stocks that perform well or lose less value. Recession stocks can be considered to be defensive stocks as they are able to sustain growth or limit their losses during an economic downturn. These stocks generally belong to industries that offer certain goods and services that consumers cannot do without, regardless of the prevailing economic condition.
Kavan Choksi talks about certain industries whose stocks sustain growth even during economic downturns
Recessionary periods can prove to be quite brutal for the investors. Bear markets and stock market corrections typically take place during the contraction phase. Cyclical stocks, which belong to businesses highly sensitive to the economic cycle, are usually hit the hardest hit during a recession. There also are a number of stock market sectors that tend to be relatively immune to the ups and downs of the economic cycle. They can offer somewhat recession-proof stocks to the investors. These stocks have the capacity to sustain their growth even when economic turbulence.
Many industries experience relatively steady demand at all times, which makes them fairly recession-resistant. These industries are:
- Healthcare: People cannot defer most healthcare spending. If someone gets unwell, they have to see a doctor and buy medicine. Hence, healthcare stocks are relatively safe during recessions. The services and products they offer are always in demand. The healthcare sector comprises of businesses associated with pharmaceutical, biotech, and health care equipment industries, in addition to healthcare providers.
- Consumer staples: Even when the economy hits a rough patch, people would still need to eat to survive. Due to the cash crunch, a lot of people do shift their eating habits from dining at restaurants to making meals at home. As a result, packaged food companies and grocery stores can be considered to be recession-resistant. Many household goods and personal care products also experience a relatively stable demand in recessions.
- Utility companies: Even when many businesses shut their doors, and people lose their jobs due to recessions, the demand for water, electricity, natural gas, and waste collection remains pretty stable. Companies dealing with utilities therefore generate reasonably consistent earnings throughout recessions.
- Cost-conscious retail: Consumers usually become very careful about their spending during recessions, and start to prefer lower-priced items. They may even eliminate optional expenses like paying professionals to handle routine home and car maintenance. Rather they spend their money at home improvement outlets, dollar stores, discount retailers, and auto parts store.
According to Kavan Choksi, apart from stocks belonging to above mentioned industries, large cap stocks, in general, also fare well during recessions. These stocks basically belong to companies with a market capitalization of $10 billion or more. In times of recession, the size of a business can definitely prove to be an advantage. Healthy large-cap stocks belong to companies that have a track record of stable earnings, along with expansive operations.