Introduction

Mutterings and whispers of an oncoming recession is a cause for concern for Central Banks and consumers alike and as expected in times like this, consumers will change their spending habits.

This change in consumer habits has direct impact on companies providing any services to consumers because of the recession. Savvy investors anticipate and take action based on this change in behaviour because it will affect the companies bottom line.

What is a recession? A recession is defined as two quarters of slowing economic growth and to learn more about recessions and their causes, read more about it here.

History may not repeat but it often rhymes as the saying goes and bearing that in mind, looking at the 2020 Covid induced recession and the Great Recession 2008 to 2009, we can see how market sectors are impacted.

It is worth noting the recession caused by Covid is slightly different from the recessions in the past. During Covid, the travel ban introduced by different governments prolonged the negative impact on associated stocks and sector such as Travel, Leisure and Airline.

What is a Market Sector

Before we take a look at the market sectors that do well in a recession, let us take a look at what a sector is.

In the stock market, a number of stocks or companies can be grouped because they have similar industries and this group created is called a sector.

Since these companies within the sector have similar business models, it will be easier to carry out research to determine which companies are performing the best in that sector.

With that in mind, here are the sectors in the market that perform well during an economic downturn.

Discount Retailers

Consumers watch the pennies and cents more closely as we try to stretch each penny as much as we can. Discount retailers are the answer to this dilemma since they allow consumers to get the most bang for their buck.

When times get harder, people are looking to buy only what is necessary and at a fair price and this is where discount stores come in. More people during a down an economic downturn tend to buy more of their items from discount stores.

Healthcare

Our health is important even more so during an economic down turn. The part of the world you live determines how much you will pay for healthcare and the type of healthcare you have access to.

During a recession, people still fall sick (hard to believe but they do), people still catch colds and flu so money still needs to be spent on staying healthy and surviving the recession.

Within the healthcare sector, some companies will do better than others so the opportunity exists to find companies that have low debt and more cash to weather hard economic times. 

This link shows the different companies in the healthcare sector and allows you to screen them by selecting certain parameters. In this case we have already selected companies that are classified as Healthcare companies.

It is worth noting not every company under the healthcare group will do well in a recession. For example the screener shows Drug Manufacturers, Biotechnology and Medical Device companies in the same group as Healthcare.

Bearing in mind that investors are making decisions to an extent based on the shift in customer behaviour, you can see how companies like CVS could perform better as opposed to Biotech or Drug manufacturers during a recession.

Consumer Staple

Despite the concerns of a recession, we still need certain amenities to get by and this is where consumer staple comes in. During a recession most people are likely to spend money on the necessities as opposed to holiday travel, nights out or eating at restaurants and this is reflected in the demand for the services of companies in this space.

The demand may not increase due to a recession however it can be enough to sustain the companies in that space during the hard times and that may be all they need to perform better than the rest.

Companies in this space include Procter and Gamble, L’Oreal, Nestle, Coca-Cola and Costco.

Death and Funeral Services

Grim? Yes however as the saying goes, two things are certain in life; death and taxes and during a recession, this condition remains true. One cannot invest in taxes or draw any benefit from it – unless you are the government of course but you can earn from the value generated by companies that provide funeral services.

We will not dwell on this topic too long but you get the message – these companies provide an important service in the economy. Compared with choosing to dine out or not, one cannot choose not to die eh?

It is worth looking at companies in this space to see how they perform during a down turn in the economy.

Utilities

Perhaps we should amend the quote and say the following things are certain in life; death, taxes and bills. This is where utility companies come in.

Everyone needs to have utilities managed; from waste management, paying gas and electricity bills and other services, utility companies are with you as long as you are alive and live on the grid.

As with any sector, some companies will have a stronger balance sheet while others may not so as an investor, it presents an opportunity to carry out some fundamental analysis before investing.

Companies in this sector include National Grid, Centrica, EDF, NRG Company and UGI Corp.

Summary

Many indicators are showing Europe, the US and other parts of the world are either in a recession or are witnessing slowing economic growth. The Fed tried to massage the facts in one of their earlier statements but facts are facts and even if a recession is delayed, indications show that by late 2022 or at some point in 2023, there is an increased likelihood of a recession.

The market sectors mentioned above are some of the ones that do well during periods of slowing and contracting economic growth because the services these companies provide are crucial in our lives.

Not every company is managed the same way and some companies even in this sector will be better placed to weather the economic storm.

I am certainly not offering financial advice and should you wish to invest (after consulting expert advice), a stock screener can help you find companies in the sector you are interested in and from there you can look further at the companies fundamentals.

Exchange Traded Funds are an option since that provide a low cost way to invest in a number of companies.

Main takeaway also is to think of the event, the opportunity it presents and the asset class or companies that will thrive or be least impacted, and position your portfolio from the fallout.