Well, it's official. As of yesterday, Australia is in recession for the first time in almost 3 decades. It's mind-blowing in itself that every Australian under the age of 30 has never lived through an official recession in itself.
Yes, the global financial crisis of a decade ago was a challenging economic time. But since the Australian economy only endured one quarter of negative gross domestic product (GDP) growth in 2009 (unlike almost every other country), it didn't technically qualify as a recession. A recession is only official after 2 consecutive quarters of economic growth — at least that's what the economists tell us.
And yesterday, the Australian Bureau of Statistics told us that for the quarter ending 30 June, GDP plunged by 7%. Seeing as the quarter ending 31 March saw a 0.3% GDP drop, it means we are now officially facing the dreaded R-word.
So how does one invest in a recession? It's a good question, considering the ASX hasn't seen a real live one for so long. Here are 3 things I think all ASX investors can do to navigate these strange and challenging economic times.
1) Only invest in companies that will make it through a recession
It seems like a no-brainer, but I think it's a good idea to have a think about how the companies in your portfolio are going to fare in recessionary conditions over the next year or 2. Right now, the economy is being heavily supported through government programs like JobKeeper and the coronavirus supplement.
But these are scheduled to taper off over the next 6 months. Once that happens, it's my view that we will see the true extent of the economic damage the pandemic has wrought. As such, I think it would be prudent to avoid companies with highly uncertain futures before this happens. Shares like the ASX banks, Qantas Airways Limited (ASX: QAN) and Myer Holdings Ltd (ASX: MYR) come to mind.
2) Avoid the hype train
One of the more startling trends we have seen over the past 5 or so months has been the tendency for ASX investors to enthusiastically chase the shares that are perceived to be 'winners' from this pandemic. Yes, the pandemic has accelerated many behavioural shifts that were already happening across the economy and society. Think cashless payments and food delivery. But there's a difference between investing for the future and chasing rising share prices for the sake of it.
I love disruptive companies like Afterpay Ltd (ASX: APT) and Sezzle Inc. (ASX: SZL) But looking at how a company like Sezzle has appreciated more than 2,000% since March (in the midst of a recession) gets me worried. Don't make the mistake of jumping on a bandwagon just so you can try and make some 'easy money'. It normally doesn't end well, especially in a recession.
3) Cash is king
Cash may be earning you little interest these days, but I think it's an investor's best friend in a recession. I would be extremely surprised if this recession doesn't lead to another stock market crash before its over, or at least some good old-fashioned market volatility. Therefore, I think keeping a cash position for that rainy day is a great idea right now.
Cash isn't exciting, but you'd wish you had more if the sharemarket takes a dive, trust me. You don't have to be silly and sell up everything, but I think a 10–20% cash position would be wise in these strange times.
