“India must gear up to face US recession. Unfortunately, inflation control comes at the cost of growth.
A recession in the US can have disastrous consequences for India. Long-term trends confirm our GDP growth rate can slip more than 7.2 per cent in FY23.” A headline that caught our attention.
People have been speculating about recession since the Fed increased interest rates and how it may affect us. The annual inflation rate in the US surged to 9.1%, the highest since November 1981, due to a record rise in energy prices due to the Russia-Ukraine conflict, supply chain issues the COVID-19 pandemic caused and higher food prices because of severe natural calamities.
The Fed adopted an aggressive approach to combat inflation, which may also cause the US to enter a period of a recession sometime this year or early next year, as per Bank of America analysts.
Considering that the US accounts for ~30% of the global GDP, any changes in the US economy are likely to affect the world too. So, how do you survive recession?
Let us start by understanding more about recession
What is a recession?
The US economy is technically going through a recession. Yes, you heard it right.
A recession is defined as a negative GPD growth for two consecutive quarters in any economy means recession. For example, the real GDP decreased at a rate of 0.9 percent in Q2, followed by negative growth of 1.6 percent in Q1 in the US.
Other factors that lead to a recession in the country, in addition to negative GDP, are rising unemployment levels, reduction in consumer spending, falling retail sales, and contracting manufacturing production, amongst other factors. A recession is a part of the business cycle and is, in its truest sense, totally unavoidable. We have explained the details of business cycles here.
Historical recession and market crash in the world
Historically, the US has suffered 14 recessions in the last 100 years since the Great Depression in 1929. On the other hand, India has experienced five instances of recession where the GDP contracted since India’s independence in 1947.
There were other instances where the markets were severely affected, leading to a steep decrease in the price of stocks, but there were no instances of GDP contractions in such times. These periods include the market crash during the Harshad Mehta Scam in 1992, the IT boom in the early 2000s, the housing boom crash in the US in 2008-09, and the market crash during Covid in March 2020.
The great recession of 2008, which started in the US, had a significant effect globally. India escaped the direct adverse impact of the Great Recession of 2008-09 since its financial sector, particularly its banking, was weakly integrated with global markets and practically unexposed to mortgage-backed securities. However, the Indian stock market faced severe price correction because of the weak global scenario. Hence, it was not a recession in India, but investors faced the heat and burned their fingers.
How does a recession affect investors?
Recessions have an overlapping impact on the business cycles and, therefore, the profitability of all companies. The low business scale affects the stock prices and impacts the investor’s portfolio.
During a recession, the stock market plummets, and stock prices hit rock bottom. The markets can be volatile because of a lack of direction and certainty of future recovery. The question is how to survive recession? The one way to survive recession is to plan for it.
How do plan for a recessionary phase?
Typically, a recession lasts for 8-12 months on average. Therefore, it would be challenging to predict a forthcoming recession. However, as recessions are part of the business cycles, investors can study the economic trends and patterns. Unfortunately, more often than not, a highly euphoric market could be followed by a recession, trapping most retail investors.
Here are a few things to keep in mind to survive recession
Don’t panic; rebalance your portfolio
Timely regular rebalancing of your portfolio to your optimum mix of stocks, bonds, and other asset class is a good habit for any investor. However, you must not panic. Rebalance your portfolio if there is a market sell-off. A broad market sell-off affects all sectors, stocks, and companies. Selling during market lows may be one of the worst ideas for your portfolio.
When the tides are against you, try to stay afloat for the time being till the hurricane is gone. Hold onto your investments.
Buy the dip
If you are financially stable and have been ready for such a market downturn, buy the dip. Then, buy fundamentally sound and mature stocks to pick up momentum as soon as the market recovers. It is an excellent opportunity to reduce your average cost of holding stocks and bag some great value picks.
Know your investments well and diversity
When you buy a particular stock, know why you have bought it. For example, if the reason for buying the stock has not changed because of the change in the global economic situation, don’t sell it. Further, if you know your investments well, you know the risks they carry, and hence, you should leverage that knowledge to diversify your portfolio and reduce your overall risk.
Recessions are a great time to buy stocks as you can get value stocks at reasonably low prices.
Keep up with your regular contribution.
If you have monthly SIPs planned in mutual funds, do not stop that at the time of recession. Instead, increasing the share of investment in such funds during a downturn will be wiser to lower your overall purchase cost. Getting bargain deals on your investment is a normal phenomenon during a recession. Take advantage of that.
The benefits of planning for recession well in advance and the disadvantages of not planning are
Better financial health: A recession leads to a higher unemployment rate, and you may outlive your savings because of an uncertain future. It may take a toll on your budget and impact your financial health. Planning for such an eventuality and investing right can help you survive recession.
Debt trap: If you have not planned for a recession with the help of an emergency or a liquid fund, you take personal loans for your daily expenses. It leads to a debt cycle where you take more debt to repay the older loans getting into a debt trap. Getting into a debt trap during a recession is an avoidable circumstance. You must start working to save for the future now.
Irrespective of the state of the economy, following and practicing these sound and healthy financial ideas help improve your financial stability, budget planning, and future opportunities.