Should You Invest in Stocks During a Recession?

The Indian stock markets crashed after the Russian invasion of Ukraine. It is because International crude oil prices are soaring, and India imports more than 80% of its energy needs. Moreover, foreign Institutional Investors have steadily exited Indian stock markets since October 2021. As investors worldwide rush to the safety of US government bonds, the Indian stock markets may crash further. Should you invest in stocks during a recession?

Why do investors view recessions as opportunities to invest in stocks?

The prices of stocks generally fall during a recession. You can get stocks of fundamentally solid companies at lower prices when stock markets crash. It is a company with sound financials and good corporate governance. 

You must pick stocks of companies that enjoy an economic moat if you seek high returns over the long term. These companies enjoy a competitive advantage such as excellent distribution networks or strong brand names. 

You may consider investing in stock markets during a recession as they are known to bounce back over the long term. Moreover, a stock market crash comes before a recession which means the stock markets crash first and then a recession in the economy follows. 

Many investors wait for the stock market to bottom out before investing their money in stocks. However, market experts advise against following this approach as it is tough to predict a stock market bottom. You need the right investment strategy to invest in a falling stock market. 

Investment strategies to follow in a falling stock market

You may invest in diversified equity mutual funds instead of stocks if this is your first time in the equity markets. It invests in stocks across sectors and industries, offering diversification benefits. For instance, underperformance in some sectors is made up by outperformance in others.  

You may invest in equity diversified mutual funds through the systematic investment plan or SIP. It is a method of investing fixed amounts regularly in mutual fund schemes of your choice. You will purchase more units of equity funds when stock markets are down and lesser units when markets rise. It helps average out equity funds’ unit purchase price over time. 

You may invest directly in stocks if you are a market-savvy investor with higher risk tolerance. It helps to research and pick fundamentally strong cyclical stocks that could do well when stock markets bounce back. For instance, macroeconomic changes in the economy impact cyclical stocks such as those from financial services, airlines, hospitality etc.   

You may consider investing in defensive stocks during a bear market. For example, stocks from FMCG, pharmaceuticals, and utilities are defensive stocks. These are stocks of companies whose products and services enjoy strong demand even in a recession. 

You could avoid picking stocks of companies with massive debt on their balance sheet during a recession. These companies could struggle to service their interest burden during harsh economic conditions. You may avoid the temptation to not invest in a falling stock market. Otherwise, when the markets bounce back, you will miss out on significant opportunities to earn higher returns. 

You could consider looking at recessions as opportunities to buy fundamentally strong stocks at bargain prices. Moreover, you must select a sound investment strategy and invest after thoroughly understanding stocks.

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@clear.in