Is any investment sector recession-proof?

No, is the simple answer. In this article, we will look at which industries are impacted more than others. We will also review the reasons behind what can be significant performance differences, shocks, on the upside and the downside, and expectations during an economic downturn. 

At Global Investment Strategy UK Ltd, we have a relatively high contingent of short-term trading clients. Our ongoing investment in trading platforms and speedy trade execution services is invaluable in this scenario. 

 

UK economy

Trade execution timing will be even more critical in the coming weeks and months, especially for execution-only short-term traders. This is because the UK economy contracted by 0.1% during March, following 0% growth in February and 1% GDP growth in January. Consequently, many experts are now predicting a recession which often means increased volatility.

 

Expect the unexpected

Volatility creates the perfect scenario for execution-only short-term/day traders looking to take advantage of market uncertainty. Even as we enter a difficult period for the UK economy, there will still be some unexpected announcements of a positive nature. So, which industries will execution-only investors have their eyes on?

Even though the following sectors have performed relatively well during challenging economic times, in real terms, it is difficult for any industry to escape share price falls in this environment. However, some of the better-performing sectors during times of recession include:-
 

Healthcare

Traditionally, healthcare has tended to perform relatively better than the markets during economic turmoil. It is impossible to defer healthcare spending; if you are ill, you need treatment. This historic relative outperformance tends to be focused on the mainstream established healthcare companies, with more speculative investments in this area often impacted by investors de-risking.
 

Staple consumer goods

While many people will be forced to cut back their spending and consider supermarket own brand purchases, we all need to eat. Consequently, discount stores selling everything from food to household and personal products can often see a significant increase in turnover. The situation has been a little different of late, with supply line issues causing a spike in the cost of most food products. However, historically this is an area which has held up relatively well.
 

Utility companies

While often seen as “boring” investments by execution-only short-term traders, utility companies, on the whole, tend to hold up relatively well during economic downturns. Even though we are currently experiencing an unnatural scenario, with the price of oil and gas impacted by supply issues, this won’t last forever. The almost constant spectre of an energy company windfall tax has created a degree of volatility that has not gone unnoticed by execution-only short-term traders.

On the flip side of the coin, many execution-only traders will look to short those sectors seen at the greatest risk of significant falls during times of recession. Some of the industries most affected by recession include:-
 

Technology companies

We will likely see a significant difference in the performance of established technology companies compared to those of a more speculative nature. In essence, when the economy is struggling, many investors will look to de-risk their investments, with early-stage technology companies often seen as one of the riskier areas. During periods of extreme volatility, this can again create investment opportunities for execution-only short-term traders. A high-risk but potentially high reward scenario!
 

Retail

It is essential to distinguish the vast difference between value retailers and those towards the higher end of the market. This is because the first element of expenditure to be hit during a recession is discretionary spending. Much of which focuses on the high-end of the retail sector. Consequently, this is an area that is often targeted by day traders looking to short stocks and buy back at a lower price.
 

Leisure and hospitality

Again, leisure and hospitality are seen as areas of the economy that benefit from strong discretionary spending. Unfortunately, in times of trouble, this type of expenditure tends to be most impacted. Social events, such as weddings, birthday parties, theatre evenings, restaurants, and high-end entertainment facilities will struggle. In addition, a sudden drop in business levels can push many businesses to the financial precipice, with little or no time to reorganise their base costs.

 

Short-selling and de-risking

On many occasions in the past, we have seen markets reacting to what may lay ahead for companies instead of recent profit numbers. Panic and fear can lead to overdone share price falls, often exacerbated by execution-only short sellers, as investors fear the worst. During recessionary times we will also see a degree of de-risking from investors, which may sometimes create short-term buying opportunities for execution-only day traders.

 

Trading in a different environment

While the recession will impact all elements of everyday business life, there are still ways and means of capitalising on short-term price movements. For example, many execution-only investors will look at overdone falls or exuberant rises, often preceded by surprisingly positive news, as trading opportunities. 

While trade execution timing is always critical, share price movements can sometimes be more unpredictable during recessionary times. Nevertheless, execution-only traders able to "listen to the market" can still deliver profits, even if it is challenging. Here at Global Investment Strategy UK Ltd, our clients continue to benefit from ongoing investment in new technology and trading platforms.

 

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