The UK economy experienced a technical recession in the third and fourth quarters of 2023, which saw its GDP contracting by 0.3% by the end of its fourth quarter.
As an investor, you may be wondering how to navigate these uncertain times. The key is to take a long-term perspective and invest in assets that historically perform well during a decline in economic growth.
In this guide, we’ll explore what to invest in during a recession in the UK. The goal is to build a diversified portfolio that can weather volatility. With the right strategy, you can not only survive but thrive financially during economic recessions.
Recession Investing: Should You Invest During Economic Downturns?
Yes, recessions can be an opportune time for investment. Property values and stock prices often decline during recessions, meaning your money goes further. However, you should choose investments wisely and consider partnering with an expert.
Invest in the right asset class.
Not every asset type qualifies as a recession investment. When investing in property, for example, certain types of properties tend to withstand recessions better.
Residential property developments, in particular, remain in demand even during downturns. People will always need places to live, so residential rentals are a stable option. Commercial properties with long leases and high-quality tenants are also good recession-resistant investments.
We recommend avoiding speculative commercial sectors like retail, as tenants in these properties may struggle to pay rent.
Work with a professional.
Navigating recessions and choosing suitable investments is challenging for novice and experienced investors alike. If you’re looking to invest in real estate, consider seeking advice from a property investment expert like Baron & Cabot. We have the knowledge and experience to guide you through economic downturns and help build a robust property investment portfolio.
While recessions create uncertainty, they also breed opportunity. With the right strategy and guidance, investing during economic downturns can lead to substantial returns as markets recover. Although we have briefly touched on property investment, there are many more asset classes and investments that are suitable for recession — continue reading to learn more.
5 Best Investments During a Recession
If you’re looking to explore passive income investments that make your money work for you, even during a recession, then consider investing in the following:
- Real estate/property
- Stocks
- Bonds
- Gold
- Small businesses
1. Real Estate/Property
Based on past performance, property is one of the best investments during an economic downturn. House prices often decrease in value during a recession, allowing investors to purchase at a discount. Once the economy recovers, property values historically rise again, allowing investors to sell at a profit.
The buy-low, sell-high strategy works well for real estate. Our research at Baron & Cabot shows the average UK property values increased by over 40% in the 10 years following the 2008 financial crisis. In essence, if you’re looking for how to make money in a recession in the UK, property is a top option!
2. Stocks
When stock markets decline significantly during a recession, it can be an optimal time to invest in this asset class. As Warren Buffett quipped, “Be fearful when others are greedy and greedy when others are fearful.”
Consumer-discretionary stocks with stable business models are good options in comparison to highly speculative or cyclical stocks. Businesses not tied to the economic cycle, like healthcare, consumer staples, and utility sectors, tend to be more resilient during downturns. Growth stocks also become more attractively valued.
For example, between 2009—after the financial crisis—and 2018, the FTSE 100 has returned a 7.38% gain annually.
Tip: Check out our guide to know whether now is a good time to invest in stocks.
3. Bonds
Bonds, especially investment-grade corporate bonds, are a popular investment during recessions. The reason for this is that as interest rates decrease, bond prices increase.
Central banks’ bonds provide fixed income and low volatility. They are essentially an IOU (I owe you) from the bond issuer, so they focus on high-quality investment-grade bonds.
Longer-duration bonds tend to provide higher returns. While the UK 10-year British government bonds fell to 3.44% during the 2008 financial crisis, it is still a relatively safe way to hedge your portfolio.
4. Gold
Gold is a hedge against inflation and market turmoil. Its price often rises during economic and geopolitical instability. For example, gold returned over 25% in the 18 months following the 2008 stock market crash.
Gold also provides portfolio diversification due to its low correlation to traditional assets like stocks and bonds. You can invest in gold bullion, gold ETFs, gold mining stocks, or gold futures.
5. Small Businesses
While many small businesses struggle during recessions, others thrive. Focus on businesses providing essential products and services, as well as innovative companies able to gain market share from weak competitors.
Small business stocks and private equity investments can generate high returns coming out of a recession. Many successful companies like Microsoft, FedEx, and Starbucks launched or grew rapidly during economic downturns. With high risk comes high reward.
Overall, while you have many options for investment during a recession, it’s always essential to make an informed decision by working with an expert before making a decision. Also, while it’s possible to profit from any asset class and investment options we’ve covered, real estate has historically performed better, with over 75% post-recession gain — a stark difference from bonds and stocks’ volatile markets. We’ll explore more about property investment in the next section, covering its opportunities and risks.
Investing in Real Estate During Recession: Opportunities and Risks
While recessions can negatively impact the housing market, they also present opportunities for investors to acquire distressed properties at lower prices.
Opportunities in Real Estate Investing
During a recession, property owners face difficulties repaying mortgages, triggering foreclosures and short sales increases. This results in a rise of distressed properties in the market, allowing investors to purchase properties at significantly lower prices, which can be up to 20% below market value. Investors can then profit from these properties once the economy and housing market recover.
Working with property investment experts can help identify these opportunities. At Baron & Cabot, we use advanced analytics to determine properties with strong potential for price appreciation and healthy rental yields post-recession. Our local knowledge and expertise ensure that the properties recommended match investors’ goals. You can reach out to us now to learn more.
Risks to Consider
While the prospect of buying cheap properties is appealing, real estate investing during recessions also poses risks. Economic uncertainty makes it difficult to determine how long a recession may last and the timescale for market recovery. This could impact your ability to sell or rent the property for a profit.
Financing property purchases may also prove challenging as lenders tighten their lending criteria during downturns. Stricter regulations on mortgages reduce the number of people who can obtain them, impacting property sales and demand for rentals.
To mitigate risks, work with property investment experts and conduct extensive due diligence on any property before purchasing to determine its potential and ensure it aligns with your investment goals.
With careful research and the right guidance, real estate investing during recessions can be extremely rewarding. However, if you’re more business savvy, you might consider starting up a small-scale business or investing in a startup in addition to investing in property. Let’s explore the options available for small businesses and startup investment during a recession in the next section.
Startups and Small Businesses: Smart Bets in a Recessionary Economy
The United Kingdom’s small and medium-sized enterprises make up an astounding 99.9% of businesses and account for 61% of all private-sector employment. While talks of an economic downturn can negatively impact confidence, certain industries—such as technology, healthcare, and essential goods and services—continue to thrive during recessions. Focusing investment efforts in these resilient sectors can yield solid returns.
Technology
Technology companies, especially those offering efficiency and automation solutions, often prosper during economic downturns as businesses look to cut costs. Areas like fintech, medtech, cleantech, and edtech are poised for growth. While riskier, the potential for high rewards makes tech startups an appealing investment option. Seek opportunities with pragmatic business models, strong leadership teams, and enough funding to weather short-term struggles.
Healthcare
Healthcare is a recession-resistant industry, as people continue to require medical care regardless of economic conditions. Innovations in areas like telehealth, personalised medicine, and healthcare software provide openings for investment. Evaluate opportunities based on the strength of the underlying technology or service, the experience of the team, available funding, and partnerships with established healthcare organisations.
Essential Goods and Services
Companies providing essential goods and services tend to remain stable even when the economy falters. Areas like food and beverage, utilities, and transportation are often good options. While less risky, returns may be more modest. Look for companies with competitive advantages, solid customer bases, and reasonable valuations. Bonus points for a socially conscious mission or sustainable business practices.
In summary, while recessions bring uncertainty, they also provide opportunities for investment in resilient industries and at reduced valuations. People who understand how to invest during a recession bank on resilient business solutions and real estate for solid returns when the skies clear once again. But with a growing portfolio, you can easily feel overwhelmed. Below are some smart ways to manage your investment portfolio.
Managing Your Investment Portfolio in a Recession
Proper management is key to a successful investment strategy. As you prepare for a recession, your portfolio is likely to grow bigger.
Here are some smart ways to manage your investments:
- Diversify your holdings.
- Increase exposure to defensive sectors.
- Actively manage your properties.
1. Diversify your holdings.
During an economic downturn, it’s crucial to have a diversified investment portfolio. Don’t put all your eggs in one basket by investing heavily in a single asset class, sector, or region. Spread your investments across various asset classes like stocks, bonds, and real estate. Within each asset class, choose investments from different sectors and markets.
For example, for stocks, invest in defensive sectors like healthcare and consumer staples in addition to growth sectors. For real estate, consider residential property developments in different locations. Diversification reduces risk and provides more stability to your portfolio.
2. Increase exposure to defensive sectors.
Defensive sectors like utilities, healthcare, and consumer staples tend to be less volatile during recessions. People still need electricity, medical care, and basic goods like food and household products, even during downturns.
Consider starting a business or increasing your exposure to companies in these sectors. Their revenues and dividends are more stable, so their stock prices are less likely to decline significantly.
For real estate, focus on properties leased to tenants in defensive industries. Their rental income will likely remain steady, and they’ll continue to attract strong tenants.
3. Actively manage your properties.
For real estate investments, take an active property management approach during recessions. Work closely with a lettings and management company to keep vacancy rates low by offering competitive rents and incentives to high-quality tenants. Also, make necessary repairs and upgrades to ensure your properties remain attractive.
Consider allowing temporary rent reductions or payment plans for trusted tenants facing financial difficulties — it’s better to provide short-term relief than to deal with prolonged vacancies. Don’t forget to stay on top of market conditions so you can adjust your strategy quickly. With active management, real estate investments can remain surprisingly resilient even in the worst of times.
The key to navigating your investment portfolio is knowing where to invest during a recession, defensive positioning, and active management. Spread your risks, invest in stable sectors, focus on high-quality and reliable tenants, and make prudent adjustments to suit the changing times. If done right, your investments can weather any economic storm.
Another important consideration when investing during a recession is taxation! Keep reading to learn an important strategy that will help you reduce the tax burden during a recession.
Tax Loss Harvesting: An Investment Strategy for Recession
Tax loss harvesting is a strategic approach to managing your tax liability during a recession, and it offers the following benefits:
- Offsets capital gains
- Reduces tax liability
- Optimises investment portfolio
1. Offsets Capital Gains
During an economic recession, tax-loss harvesting allows investors to generate tax benefits. It involves selling investments that have declined in value to realise capital losses, which can then be used to offset capital gains and reduce taxable income.
Here’s an example: An investor realised £50,000 in capital gains last year but also realised £30,000 in capital losses this year. In this case, the capital losses can be used to offset £30,000 of the capital gains, reducing the investor’s taxable income by £30,000.
2. Reduces Tax Liability
Any remaining capital losses after offsetting capital gains can be used to reduce an investor’s taxable income by up to £3,000 per year. For instance, if the investor in the example above had no capital gains this year but realised £30,000 in capital losses, £3,000 of the losses could be used to reduce taxable income this year, with the remaining £27,000 carried forward to offset gains and income in future years. This can produce meaningful tax savings, especially for investors in higher tax brackets.
3. Optimises Investment Portfolio
Tax-loss harvesting not only provides tax benefits but also gives investors an opportunity to rebalance their portfolios. By selling underperforming investments to generate losses, investors can reinvest the proceeds in other assets that are better positioned for recovery and future growth. This helps ensure that portfolios remain optimised to achieve investment objectives even during market downturns.
If you’re looking for how to profit from a recession, tax loss harvesting is an important strategy. For long-term investors, the benefits of tax-loss harvesting can endure for many years. By being proactive and taking losses when they occur, investors can maximise after-tax returns and build wealth over time.
The Best Investment During a Recession: Final Verdict
Our top pick for the best investments in a recession in the UK is property!
Real estate has historically been one of the most stable investments during economic downturns. Available data shows that UK house values fell by only 18.5% from peak to trough during the 2008 financial crisis, compared to a 39.3% drop in the FTSE 100.
While real estate values may initially decline during a recession, they are primed to recover strongly once the economy starts to rebound. Other reasons we prefer real estate over other investment options are that it’s a tangible asset, it’s stable, and it offers diversification. To learn more about whether you should invest in property or shares, check out our recent guide.
Property as a Tangible Asset
Real estate is a tangible asset that holds inherent value, unlike stocks or bonds. Property can generate income through rent payments, even during a recession. As demand for rentals persists during economic instability, rental yields are likely to rise. Once the recession ends, property values and rents are likely to appreciate again, and you can sell them off for profits. For investors, real estate also offers tax advantages and the potential for high returns.
Diversification and Stability in Property
A recession often negatively impacts many asset classes, but real estate typically provides more stability and security. By diversifying your investment portfolio to include property, you can balance out the stock market volatility and other riskier investments. While property values may decline initially in a recession, they are less prone to the sharp drops frequently seen in the stock market.
Other Options to Consider
Beyond real estate, precious metals like gold and silver are popular recession-proof investments. Gold, in particular, is seen as a hedge against inflation and market volatility. Consumer staples stocks, like food and household goods, also tend to hold up well during economic downturns as demand remains relatively stable. For the risk-tolerant, starting a small business can be an option, but only for those with ample savings to sustain operations until the economy improves.
The UK investment landscape has always been open to both residents and non-residents. For international investors who may want to take advantage of the UK’s robust economy, there are certain things to consider, as we’ll see below.
Final Notes to International Investors
Should you invest during a recession in the UK if you’re a non-resident?
As an international investor in the UK, it’s crucial to do extensive due diligence before investing in the British economy, particularly if the country is experiencing an economic downturn. While recessions often create anxiety for investors, the UK remains an attractive market for international investors if approached strategically.
Before investing in UK property or businesses, consult experts well-versed in the British investment landscape, such as wealth managers or financial planning advisors. They can advise you on industries and regions poised for growth despite macroeconomic headwinds.
For example, some analysts predict that the technology and healthcare sectors may weather a recession well due to increasing demand for their products and services. Geographic areas with strong population and job growth, such as cities in the North West and Midlands, could also make strategic investments.
While recessions inevitably create uncertainty, the UK remains an attractive market for the patient, strategic investors. If you’re considering investing in property, consider setting up a free consultation with professionals like Baron & Cabot. Our expert team will help you do due diligence to ensure the next recession—if any—presents an opportunity rather than a threat.
Frequently Asked Questions
What stocks to invest in during a recession?
During a recession, investing in real estate, stocks of consumer staples, utilities, money market funds, and healthcare companies is wise. These sectors offer goods and services always in demand, regardless of economic downturns, making them more resilient investment choices in challenging times.
What is the best thing to do with money in a recession?
In a recession, it’s prudent to save for an emergency fund, reduce debt, and manage your personal finance situation by investing wisely. Securing a fixed-rate mortgage can protect against interest rate fluctuations while reviewing insurance ensures adequate coverage. Additionally, continuing to prioritise pension contributions can safeguard long-term financial health.
Is it good to invest during a recession?
Investing during a recession can be beneficial, as lower stock prices offer opportunities for purchasing shares at a discount. If your finances allow and you believe in a company’s long-term success, buying in a downturn can lead to significant gains. Before selling existing investments, consider the potential for long-term growth, which could outweigh short-term losses.
How do you profit from a recession?
To profit from a recession, investors often target funds concentrating on consumer staples or large-cap companies, which typically offer more stable returns than smaller firms. These sectors are less volatile during downturns, as demand for essential goods remains constant, providing a potentially safer investment haven.
Conclusion
If you’re thinking about what to invest in during a recession, UK property remains a solid long-term strategy. The market may fluctuate, but housing needs aren’t going away.
Focus your investing on reasonably-priced property developments in economically diverse areas to balance risks. Consider both residential rentals, which offer steady cash flow, and flips, which can bring bigger returns. Stay patient and persistent, even when the market dips — the housing crisis persists, so quality properties will continue appreciating over the long run.
With the right property in the right location, investing during a recession can pay off big when the economy rebounds. The key is choosing investments wisely and maintaining them for the future rather than seeking a quick buck. Remember to always consult an industry expert to ensure you are making the right decision.
Contact Baron & Cabot today for expert guidance on property investments!
Disclaimer: Any information provided by Baron & Cabot does not constitute financial advice and is for educational purposes only.
