Making savvy investments in uncertain times
Tan Jee Yee 
An economic downturn is when people stop spending and investors start reducing their risks. But could it be a good time to start investing? –

“Go robbing during a fire” is a popular Cantonese saying, though it’s less of a proverb than an expression.

It’s tantamount to benefiting in times of disaster, or taking advantage of the misfortune of others. Though, in a more innocuous interpretation, it could also mean grabbing an opportunity at the right time.

You can probably use the expression for investors who hedge their bets during volatile economic times. It could be a stock market crash, or when an industry powerhouse shutters its business. It could be during a recession. To paraphrase Warren Buffett, the market could be up or down, but there will always be intelligent things to do.

Malaysia is currently facing a measure of economic uncertainty. Some political and economic analysts have predicted that we may face a recession next year. Though the authorities have sought to assuage such fears, some people are still concerned.

For investors, it may be a sign to start recession-proofing their investments. Or, perhaps, to start thinking about investing.

Undoubtedly, there will be opportunities and areas to invest in during economically troubled times. The main question, of course, is how to do it and which areas to aim for. We will attempt to answer that question, but for now, it’s perhaps more important to first understand how a recession works.


What happens during a recession?

“More accurately, we should first understand how the business cycle works,” says Stanley Andrews, a Malaysian-based financial adviser at advisory firm The Balanced Solution. “It’s so (that) you get a simpler look at the economic landscape.”

A business cycle is made up of four different periods of activity, each of which can last months or years. Its peak is when the economy is running at full steam, when employment is at or near maximum levels, and gross domestic product (GDP) is growing at a healthy rate.

“Incomes are rising, prices are rising due to inflation, and most businesses, workers and investors are enjoying the good times,” Andrews says.

Andrews says history has shown that bad times don’t last

When it all comes down, that’s the “recession” bit of the cycle. Essentially, after experiencing a great deal of growth and success, income and employment may begin to decline due to a number of causes. These could be external events such as an invasion or a supply shock, or even a drop in consumer spending due to inflation.

“This, in turn, can lead to employee layoffs, and rising unemployment will push consumer spending down even further,” says Andrews. When the people are not spending, it will create a vicious cycle of economic contraction. He adds that a recession is generally defined as two or more consecutive quarters of decline in real GDP.

Following the recession is the “trough”. This is when output and employment hit bottom. At this point, spending and investment would have cooled down significantly, pushing down prices and wages. “It is that point where new investments in labour and assets become attractive to firms,” says Andrews.

It can only go up from here, which brings us to the “recovery” phase. During a recovery, the economy begins to grow again. Consumers will start spending more, firms will increase their production – which leads to more workers being hired – and competition for labour will emerge. “This will push wages up, put more money in workers’ pockets, encouraging more spending,” Andrews says.

Of course, he points out this is a simplified look at an economic cycle. Sometimes, an economy may suffer a double-dip recession, for instance where a short recovery is followed by another recession.


What does this mean for investors?

The whole process, however, is to illustrate that while things may look bleak, economies recover. “Recessions and other volatile times are often viewed in a doomsday light, but as history shows, things always recover, and those who plant the seeds of investment during volatile times may find success,” says Andrews.

He cites a study by Ned Davis Research, a US-based research firm specialising in equity, fixed income, commodity and economic research, which looked at 28 global crises over the past century from World War II to the Sept 11, 2001 terrorist attacks in the US.

According to the study, in each incident, markets overreacted and fell too far only to recover shortly after. “Those investors who sold their assets out of fear found themselves having to buy back their portfolios at higher prices.

“Patient investors, on the other hand, were rewarded,” says Andrews.

Freelance financial adviser and consultant Connor Chin says during times of financial crisis and recession, many investors have the immediate urge to sell their assets to cut losses – an action that is completely understandable.

“We never truly know when the recovery would happen. When you see the numbers plummet, it’s easy to panic and start finding the easiest solution to reduce risk,” he says.

Chin says it’s easy to panic when you see the numbers plummet

Sometimes the panic could lead to longstanding distrust of the market. A survey by online broker Capital One Sharebuilder found that 93% of millennials in the US indicated they distrust the markets and are less confident about investing as a result. This is due to the 2008 financial crisis, which many millennials grew up through.

“In the end, it’s bias based on emotions, of concern and fear of loss. But if you intend to grow your investment, sometimes the more volatile times can offer good opportunities,” Chin adds.


Taking the opportunity

During a recession or crisis, Andrews reiterates that patience is key. “In volatile times, asset prices will fall. Buying assets during those periods and from panicking investors is like buying them on sale. Often, panic and fear will drive asset prices well below their fundamental values,” he says.

So, essentially, a recession can be one of the best times to begin investing because asset prices often fall hard. One will be able to pick up stocks, bonds and mutual funds for far less than one could have in previous years.

Buying real estate during volatile periods would be cheaper, too. “Home prices tend to go lower, and real estate investors can pick up valuable assets at below normal prices. When the market recovers, they can enjoy good returns,” Chin says.

“There are even investors who profit by taking over good companies that are battered by recession, and have them profit during the recovery period.”

Another way investors benefit during a recession is by holding out with the assets they already own. “If anything, recessions have the ability to make companies stronger,” Andrews says.

Basically, during a recession, companies go through general fat trimming and restructuring, which would allow them to emerge stronger – good news for investors.

Andrews offers one example: McDonald’s continued to expand despite being hit during the 1970s downturn when people took to cooking their meals rather than eating out. This allowed the fast-food giant to turn a profit when the market recovered, and the investors reaped the benefits.

“A recession can be seen as a blessing for investors, letting them spot a strong company beyond the veil of a strong economy,” says Andrews.


Stomach of steel

However, both Andrews and Chin say starting new investments or buying assets during volatile times is not for everyone.

“For one, you require a lot of discipline and patience. The kind of metal innards to swallow your fears while the market plummets and everyone is in a panic is not for the faint of heart,” says Andrews.

Chin adds that newcomers to investment would also require professional help and advice to avoid making bad decisions.

“You are essentially using money during a time when the natural thing to do is to keep as much as possible to grow your overall wealth. You don’t want to invest them poorly and suffer before the recovery period sets in.”

This brings us to an important caveat regarding investing during a recession or crisis: the wealth needed to back it up. More specifically, Andrews says people need to have enough liquid assets available to make opportunistic purchases.

“While it’s not necessarily gambling, investing during a crisis or recession does pose its risks. It’s certainly not something for investors with little assets to fall back on should the worst happen,” he says.

The big key to investing during volatile times, says Andrews, is to keep an eye on the big picture. While you can never know when the beginning or end of a recession may be, anticipating it is possible, and that can allow you to plan ahead.

“What you really need is the discipline to ignore the crowd, focus on your goals, embrace necessary risks and wait out the storm.”

Where to invest during a downturn

While an economic downturn may be a good time to grow your investments, it doesn’t mean that everything is a worthy place to hedge your bets on. Here are some areas you can consider investing in during a recession:


1) Investing in stocks

According to financial adviser Stanley Andrews, when investing in stocks during recessionary periods, the safest places to park your money are high-quality companies with a long history. “These are the companies that have proven, time and time again, that they can handle prolonged periods of weakness in the market,” he says.

This may require much research, but Andrews says it essentially refers to companies with little debt and healthy cash flow, which allow them to handle an economic downturn and continue funding their operations. Companies on the other end of the scale – that is, those with a lot of debt – may have trouble weathering the storm.

Other relatively safe places to invest in include businesses that focus on consumer staples – essential products such as food, beverages and household items (tobacco is often listed here as well). They are goods that people are unable or unwilling to cut out of their budgets regardless of their financial situation.

“Consumer staples are considered to be non-cyclical – they are always on demand, regardless of the economy,” Andrews says.

Investors are also known for taking advantage of falling markets by short selling stocks. Here, they make money when share prices fall and lose money when they rise. Andrews advises against it, unless one is well-versed enough to do it.


2) Investing in commodities

Andrews says commodity prices tend to drop during a recession. Natural resources are mostly needed for growing economies, so when growth takes a halt, commodities tend to drop in prices. “Therefore, if investors believe a recession is coming, they will sell commodities, driving prices lower.”

This makes it a good time to buy commodities, and reaping the benefits when the market stabilises. However, Andrews says commodities are also traded on a global scale, so a recession in Malaysia, for example, may not necessarily have a large, direct impact on commodity prices.

“This, on the other hand, also means that commodities may remain strong regardless of the economic situation of your country, so it’s a sound investment all the same.”


3) Investing in real estate

As mentioned earlier, recession and other crises can drive real estate prices down. Opportunistic investors can take the opportunity to obtain good estates for cheaper than normal and sell them when the economy recovers.

Real estate broker Johnson Ang says a good place to start is to pay attention to those who may want to sell their homes in a hurry. “This gives you additional bargaining power. You can ask the seller to throw in extras as well, like furniture and fixtures you like,” he says.

These are usually homes that have been on the market for several months and undergone several price reductions. If the house is empty when you attend the showing, it suggests the seller has moved and might be holding two mortgages, so he will be quicker to sell.

Financial adviser Connor Chin, however, says buyers should know it is not guaranteed they can make money on a given property.

“If you’re buying the place hoping to quickly flip it, it’s not a feasible plan if the down market is prolonged. You might need to hold it for an extended period of time.”

All said and done, piling into a single sector is dangerous, including consumer staples. As with most investments, it’s important to diversify during a recession, when particular companies and industries can get battered.

“What’s best is if you diversify across asset classes, such as fixed income and commodities in addition to equities,” Andrews concludes.

This article first appeared in Focus Malaysia Issue 260.