Is it possible to build a recession-proof investment portfolio that survives market fluctuations across all-natural and economy driven eventualities?
‘Recession’ is defined as two continuous quarters of negative growth in economic activity. In the Indian context, we may define it as a slower rate of growth akin to the period up till the 1990s.
The key characteristics of a recession are shrinking volumes and deflationary pressures leading to a vicious cycle of joblessness and negative operating leverage in the businesses.
As the deflationary pressure mounts, the government and/or monetary authorities first respond by cutting interest rates.
However, weak companies are unable to meet their debt obligations and thus the spread between junk/low rated bonds and government or high rated bonds may increase.
It is advisable to invest in high quality or government papers in the time of slower growth.
Secondly, low-interest rates are positive for gold as the opportunity cost of holding gold is reduced. Gold itself is not an income-producing asset but acts as protection against inflation and credit losses.
Thus, if we do not get into a deflationary scenario but into a low/negative growth scenario with low but positive inflation, gold can be a good hedge in the portfolio.
In times of a deflationary or recessionary scenario, the first casualty is discretionary spending by the masses.
While people stick to the purchase of essential goods like eatables and personal care, the discretionary spends get scaled back or deferred for future periods.
Further, companies without any leverage and with cash flow generating characteristics do better in periods of recession and thus become the preferred choice of investment.
Non-discretionary FMCG, essential utilities with regulated returns should be the first choice. Further, the lowest cost producer of any essential item without leverage becomes more competitive and fares well in recessionary periods and emerges as a winner.
Another sector that normally remains immune to a slowdown is healthcare, specially Pharmaceuticals. While the elective procedures can be deferred in difficult periods, acute care and chronic drug companies should continue to see benefits of stable demand in tough times.
The risk in pharmaceuticals may emerge from any fresh regulation or extended list of essential drugs by the government on the price control front.
In a falling interest rate and demand scenario, any dividend-paying company in sectors like power and gas utilities become attractive as interest rates go down, but the regulated returns protect the downside.
Further, as India remains an energy deficit country, even slower demand growth will not affect the overall health of utilities as lower energy prices will benefit the sector.
However, the risk would be delayed payment by state governments. As the world closes down or slows down, technology companies enhancing individual as well as corporate capabilities at large or helping to work from home should benefit in such times.
(The author is MD & CEO, TrustPlutus)
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