Where to Invest when and if Recession Comes
Published / Last Updated on 18/05/2022
Will there be a recession or not and where should you invest during a recession? These are difficult questions to quantify let alone answer.
UK GDP is weakening after being ‘quick out of the blocks’ in ‘opening up’ after covid-19 lockdown. Inflation is high, interest rates are still low but will no doubt increase. There are plenty of vacancies but not enough workers and there are too many businesses that suggest they cannot function properly with WFHs i.e., work from home staff who do not wish to return to the ‘office’.
Inflation, energy prices, food prices, the biggest squeeze on the cost of living in 40 years, the oil and gad crisis, wheat shortages and export bans in India, China lockdowns and food production unable to export from Ukraine.
In addition, investors are worried that US economic action to reduce inflation will push the globe into recession if the US slows down. In turn the UK appears to follow suit with its actions. It is all doom and gloom.
On a positive note, UK employment is up, with just 3.7% unemployed, this is the lowest in 50 years. That said, we suggest these numbers are skewed given 500,000 have changed their lifestyles and left the work environment since the pandemic started. In the USA, it is a similar picture with record job numbers by interest rates are up and inflation is at a 40-year high, despite falling slightly in April 2022.
Valuing Markets and Shares – P/E Ratios
A traditional valuation model is to use the Price/Earnings Ratio. This is the Share Price Paid as proportion of the Dividend/Earnings expected.
A high P/E ratio of 20, indicates a high share price versus its earnings. Does this tell us that the share is overvalued or do investors expect huge earnings in the future hence the high valuation.
A low P/E ration of say 5 or 6, indicates a low share price versus earnings. Does this mean investors expect the company to perform badly over the coming years or in the share price cheap and undervalued.
Looking Back to 1980s Recession
In the 1982 recession, P/E ratios for technology and raw materials stocks were at about 17. P/E ratios for utilities, oil and gas were down at 6.
P/E Ratios of FTSE 100 Companies 2022
Average P/E FTSE 100 = 14.4
- Heathcare 20.9
- Telecoms 19.7
- Technology 19.0
- Consumer discretionary goods 23.7
And the lows:
- Utilities 9.7
- Consumer Staples 9.7
- Energy -0.5
- Real Estate and Property 0.9
- Materials -7.7
Who did well after recession through the 1980s and after 2008 Credit Crunch?
- Discount Supermarkets (consumer staples as we all need to eat)
- Healthcare (we all need to be healthy)
- Food and restaurants
- Freight and logistics (transport)
- DIY and Repairs (real estate)
- Consumer staples in general
- Utilities people still need power although it may be from greener sources now)
- Discount Retailers (no more expensive shopping, it’s back to ‘Primani’ and the local market stalls.
We also see opportunity for a technology revolution, 5G communications are not yet fully utilised and healthcare. Materials may be overpriced now but they will fall back.
In times like these we suggest a balanced portfolio with a healthy mix of those High P/E Ratio sectors that will have high incomes over the coming years combined with go to low-cost recession proofed sectors that always do well when slowdown occurs e.g., discount retailers and of course new opportunities in technology, communications, and green energy.
