Top three tips for investing in a recession

The recent announcement that South Africa is in its first technical recession in nine years has dominated conversations from the newsroom to the watercooler. However, according to Herman van Papendorp, head of investment research and asset allocation at Momentum Investments, there’s really nothing technical about a recession and investors should stick to the basics to protect their investment momentum and ability to generate wealth in these pressing times.

He points out that recessions are unfortunately a fact of life – and we need to structure and manage our investments accordingly. “To cope with the inevitable volatility – regardless whether recession or boom - that characterises investment markets from time to time, you should always be appropriately diversified across asset classes, investment strategies and mandates to smooth the investment journey as much as possible,” says Van Papendorp.

He explains that a technical recession simply means that the South African economy has shrunk in size for two quarters in a row. “This implies that companies are likely to make less profit from the South African economy and hence local share prices generally reflect this,” says Van Papendorp. “While this most certainly negatively impacts certain assets, it also creates potentially lucrative opportunities for savvy investors to take advantage of during a recession, while there are also long-term benefits to simply staying the course.”

Van Papendorp lists his top investment tips for weathering a recession.

1. Understand asset classes and how they typically behave during a recession
Due to the diminished buying power in the economy, it is likely that there will also be less demand-driven price pressures in the economy, which tends to benefit defensive, fixed-income assets – like cash and bonds. Growth assets like locally-oriented equities or property generally suffer in a recession. This is the beauty of having diversified exposure to a wide range of asset classes in your portfolio.

2. Offshore asset exposure should be part and parcel of a diversified investment strategy
From a timing perspective, the best time to invest offshore is actually when the rand is strong, and not weak – which is when many investors tend to panic and look offshore. That said, if you don’t have sufficient offshore exposure, now is as good a time as any to diversify portfolios internationally.

3. Don’t panic – and stick to the plan
A recession will affect almost everyone’s investment in some form or another, but the negative impact will be far more for those who panic and make short-term, rushed decisions. As human beings, dealing with uncertainty and volatility is never easy. However, the prudent investor response would be to acknowledge that volatility is part and parcel of the behaviour of investment markets and to accept volatility as part of the DNA of investing. Always remain focused on the long-term investment goal and most importantly, don’t panic or behave irrationally, and stay invested.