Investing Strategies: Where To Place Your Money In A Downturn

When the economy is in a downturn, investors need to decide how to protect their capital and minimise losses. A common strategy is to diversify into defensive sectors and bonds, which can offer some protection against market downturns. Investors can also allocate capital to stable dividend-paying stocks and alternative investments, such as gold, which has traditionally been considered a safe haven.

During a downturn, it's important to identify undervalued assets and industries poised for recovery, which can lead to substantial gains when the economy rebounds. It's also crucial to maintain a long-term perspective and avoid panicking, as selling during a market downturn locks in losses.

Dividend-paying large-cap stocks

When considering dividend-paying large-cap stocks, investors should look for companies with a long track record of increasing dividends, indicating financial strength through different economic cycles. These stocks can provide a stable income stream during economic downturns, as the dividend payments can offset stock market declines.

• Merck & Co. Inc. (MRK): A proven innovator in the healthcare space with a strong focus on shareholder returns through various strategies.
• Air Products and Chemicals Inc. (APD): A long-term compounder for shareholders with a forward dividend yield of 2.6% and a consistent increase in net income.
• Thermo Fisher Scientific Inc. (TMO): A company with a six-year track record of boosting shareholder payouts and strong acquisitions to grow market share.
• Cisco (CSCO): A tech company that offers a reliable dividend yield of 3.2%.
• China Mobile (CHL): A state-owned Chinese telecom company with a market value of over $200 billion and reliable dividends of about 7% annually.
• Las Vegas Sands Corp. (LVS): A casino operator with a market value of $50 billion and a hefty dividend that has nearly tripled in five years, resulting in a 4.4% yield.
• HSBC Holdings (HSBC): A well-known international bank that offers dependable dividends and has seen a surge in stock price due to improved political stability.
• Blackstone Group (BX): A global financial firm with a market value of nearly $40 billion and a 7.3% dividend yield.
• Philip Morris International (PM): A tobacco company with a strong focus on emerging markets and a history of increasing dividends annually.
• General Motors Co. (GM): A rejuvenated automotive company that has reinstated dividend payments and is making ambitious efforts in the self-driving car and electric vehicle markets.

Defensive sector stocks

The main defensive sectors are generally considered to be utilities, healthcare, and consumer staples—all of which have outperformed the broad market in recent years.

Utilities

The utilities sector includes gas, electric, and water companies. These companies tend to hold up well in response to inflationary pressures because they can pass higher costs straight through to customers. They also benefit from the global energy transition from fossil fuels to electricity, which increases electricity demand and earnings growth. Examples of utility companies include:

• NextEra Energy Inc.
• Southern Co.
• Sempra Energy
• Exelon Corp.
• Constellation Energy Corp.
• American Electric Power Co. Inc.

Healthcare

The healthcare sector includes healthcare products and services, healthcare facilities, and companies involved in medical research, pharmaceuticals, and biotechnology. Demand for healthcare services tends to be less volatile, even during recessions. Examples of healthcare companies include:

• UnitedHealth Group Inc.
• Eli Lilly & Co.
• Johnson & Johnson
• Thermo Fisher Scientific Inc.
• Humana Inc.
• Boston Scientific Corp.
• Cigna Corp.

Consumer Staples

The consumer staples sector includes products that people need and/or use all the time, such as food and beverages, medications, household items, personal care products, tobacco, and packaging. Examples of consumer staples companies include:

• Coca-Cola Co.
• Procter & Gamble Co.
• Walmart Inc.
• Mondelez International Inc.
• Monster Beverage Corp.
• Philip Morris International Inc.
• Boston Beer Company

Gold and silver

Gold has traditionally been viewed as a safe investment due to its historical track record of holding its value, even with short-term fluctuations. It benefits from economic distress and crisis, and investors typically seek it out during times of fear and uncertainty. Gold also has a negative correlation with stocks, meaning that when stocks go up, gold tends to go down, and vice versa. This makes it a good diversifier for a portfolio, as it can provide stability and security when traditional investments falter.

Silver is also a precious metal that can be a good investment during a downturn, but it behaves differently from gold. Silver is more closely tied to the global economy and is used extensively in heavy industry and high technology. This makes silver more sensitive to economic changes, and its price is more volatile than gold. During stock market crashes, silver has not performed as well as gold, but it has still offered some protection against losses. Silver is also currently cheaper than gold, making it more accessible to small investors.

Both gold and silver are good options for diversifying a portfolio and protecting against market volatility, inflation, and fiat currency risks. However, gold is generally seen as a more powerful diversifier due to its low correlation with other asset classes.

It is important to remember that the prices of gold and silver can fluctuate, so patience and careful consideration are necessary when investing in these precious metals.

Healthcare sector stocks

Defensive sectors like healthcare tend to remain stable or perform well during economic downturns. This is because people will still need to spend money on healthcare products and services regardless of the state of the economy.

During the brief recession caused by the coronavirus, for example, stocks in top pharma companies like AstraZeneca, GSK, Sanofi, and Novartis were harmed by the market crash, but they bounced back quickly relative to the value they lost.

Healthcare stocks are therefore a good way for investors to hedge against recession risks. However, it's important to note that not all areas within the healthcare industry will perform the same during an economic downturn. While pharmaceutical companies will likely avoid the worst effects, biotech companies—especially smaller ones—will be hit harder. This is because they often have nothing on the market and so have little in the way of revenue. They also tend to rely on issuing new shares of stock to raise capital, which is much less appealing during a recession when share prices are dragged down by poor economic and market sentiment.

That said, biotechs that see success in their clinical trials will still experience rises in their share prices, and new drugs will still get commercialised and yield revenue.

Some examples of healthcare stocks that could be a good investment option during a recession include:

• UnitedHealth Group, Inc. (UNH)
• Encompass Health Corp. (EHC)
• Eli Lilly and Co. (LLY)
• McKesson Corp. (MCK)
• Boston Scientific Corp. (BSX)

Bonds

There are three main types of bonds: corporate bonds, municipal bonds, and treasury securities. Corporate bonds are issued by public and private corporations, and their interest rates are influenced by the creditworthiness of the company. A high-yield bond, or junk bond, is issued by a company with a lower credit rating and thus carries more risk. Municipal bonds are issued by states, cities, and counties, and can be further broken down into general obligation bonds, revenue bonds, and conduit bonds. Treasury securities are issued by the US Treasury Department and are considered the safest type of bond as they are backed by the full faith and credit of the US government.

While bonds are generally considered a safe investment during a downturn, they do come with certain risks. For example, bond issuers can default on their loans, and rising interest rates can negatively impact the value of existing bonds. Additionally, bonds may offer lower returns than stocks, and it is important to remember that not all bonds are created equal—some carry more risk than others.

When considering investing in bonds during a downturn, it is essential to keep your investment goals in mind and to create an investment policy statement (IPS) to guide you through changing market conditions. A diversified portfolio that includes both stocks and bonds can help cushion the impact of a downturn and position you to profit from a recovery.

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