[Ask TBM] Should You Make Investments During a Recession?

Recessions are usually a cause for alarm, but is it actually a good time to invest? We asked a portfolio manager who works with BDO Private Bank for tips and advice.

Will the Philippines experience recession this year? According to Felipe Medalla, the Governor of Bangko Sentral ng Pilipinas, the Philippines will only experience a “low growth” for 2023—not a recession. The World Bank, meanwhile, expects the country’s economy to lose momentum with its growth forecast set at just 5.7% due to inflation and high interest rates. 

Given that the International Monetary Fund (IMF) has warned that a third of the world’s economy will be in recession this year, it is understandable that many are worried. After all, a recession signals a significant downturn in economic activity, which is a cause of concern for not just governments and businesses, but regular citizens as well. 

But with stock prices falling across the board, can a recession be a good opportunity to actually invest? For this, we asked Bienvenido Gerard “Obrec” P. Cerbo III, the Portfolio Manager managing Multi-Asset Portfolios and former Trader dealing with Local and Foreign Equity Securities for BDO Private Bank. 

What are some misconceptions when it comes to making investments during a recession?

A common misconception is that recessions are the worst time to invest your money and [that you] should just keep your money in cash. While it is always good to keep an ample amount of cash or liquid assets in times of recession, investors should also consider putting their excess funds to work. 

Differences in the length of time the economy may be in a recession may vary (it can be a few months to a few years), but what recessions have in common is that asset prices often rally coming out of the recession. This is caused by the forward-looking nature of capital markets [when] investors are already anticipating the economy to recover before it even begins. 

A good example of this is the S&P500 Index in 2007 during the Global Financial Crisis wherein it plunged by as much as -57%. Coming out of the GFC, the S&P500 rose by as much as 401% from its trough, while in 2020during the COVID-19 pandemic recessionthe S&P 500 dropped by as much as -37% and jumped by 113% in less than a year. 

Long story short, recessions are not always a bad thing with regard to investments, [as] they can be opportunities to find undervalued assets and help you increase your personal wealth.

What are the advantages of investing during a recession?

A recession or signs of a potential recession coming often lead to depressed or discounted asset prices—not only for stocks but also for fixed-income securities such as bonds. This gives investors a great opportunity to enter the market at low prices. 

However, do not let the attractiveness of low prices hinder you from doing your research and due diligence. Investors should still try to understand the nature of the businesses they invest in and the possible growth prospects they can achieve coming out of a recession.

What are the disadvantages of investing during a recession? 

With all investment opportunities, investing during a recession comes with its risk. One particular risk is that asset prices tend to be more volatile than usual. Investors should expect big swings both on the upside and on the downside with regard to their portfolio during these times.

Nonetheless, if you are a long-term investor—this should not be much of a worry if you were able to conduct your research on your investments thoroughly. 

Another risk or disadvantage in investing during the recession is that your investment horizon might not match with the economic recovery (aka the economy coming out of the recession, which leads to asset prices rising). This mismatch may cause investors to liquidate assets too soon, [thereby] missing the opportunity of greater returns, or worse—liquidating investments at a loss.

What types of stocks would you recommend for people to invest in during a recession?

Stocks that are defensive in nature should bode well in a recessionary environment. These include utility (water, electricity, etc.) and telecommunications companies. These sectors relatively perform better during a recession mainly because consumers will still need these services despite an economic downturn. 

Also, look for stocks that offer attractive dividend yields. This will help you generate income while waiting for asset prices to recover. Utilities and telcos also fall under this category.

What other financial instruments would you recommend during a recession? 

Investing in bonds is a great way to generate a steady stream of income during economic recessions. [With that being said,] investors should look at investment-grade bonds during economic downturns to ensure that credit quality is intact. 

During recessions, bonds usually trade at a discount to their par value. [Thus], investing in discounted bonds gives you the benefit of:

  1. Receiving the coupon payments of the bond
  2. Redeeming the bond at par once the bond matures

Keeping a portion of your investable assets in cash or money market securities is also recommended during economic recessions. This will help cushion your portfolio from any adverse mark-to-market movements from either your equity and/or bond investments. 

Bienvenido Gerard “Obrec” P. Cerbo III works with BDO Private Bank as a Portfolio Manager managing Multi-Asset Portfolios for high-net-worth clients. Prior to becoming a Portfolio Manager, he was a Trader for the same company dealing in Local and Foreign Equity Securities (stocks).

Prior to joining BDO Private Bank, he was an Equity Research Analyst for AIA Philippines, conducting research, analysis, and valuation of Philippine stocks. Obrec is also a CFA Level 3 candidate.