What Assets Can You Trade During a Recession?

Updated August 19, 2022 GuidesTrending

A recession is associated with falling prices, but there is still value to be found. Here are four assets to consider trading during a market downturn.

It can be difficult to decide what you could trade during a recession. Indeed, when an economic contraction is taking place, investors tend to be defensive and respond by pulling out from the market.

While there are some investors who prefer to exit and wait out the storm, others may choose to keep their investments. This is because doing so can allow them to create market opportunities.

This change in focus causes different asset classes and companies to come into the spotlight during periods of market turmoil.

What’s interesting is that these rotations seem to follow a pattern, with certain asset classes throughout history emerging as preferred investments in troubled times.

Hence, if you proceed carefully and choose the right assets for you, you can potentially discover opportunities from the market even during a downturn.

Should you trade during a recession?

Trading during a recession might seem like a bad idea. Afterall, this is a period when asset prices are mostly falling, causing uncertainty, fear and volatility in the markets.

On the other hand, a recession also offers opportunities that might be unavailable at other times.

For instance, many CFDs on stocks and equities can be bought at lower prices, which is an option for those pursuing a buy-and-hold strategy.

Also, heightened market volatility creates more opportunities for traders using derivative products such as contracts for difference (CFDs).

Having said that, it’s important to recognise that trading during a recession can carry higher levels of risk, and extra care should be taken not to overextend yourself financially.

Four asset classes to consider trading in during a recession

Defensive stocks

Stocks and equities are the backbone of the financial markets so it’s no surprise that investors continue to invest in them even during a market downturn.

In particular, investors increase holdings of defensive stocks – stocks that have a history of providing consistent and stable dividends no matter the state of the overall market[1]. These stocks usually belong to companies that see constant demand for their products, leading to relative stability throughout the business cycle.

Over the long term, defensive CFDs on stocks could provide similar opportunities as other types of stocks, and with lower levels of risk. However, the downside is that because they are so stable, defensive stocks often do not grow as much as cyclical stocks during a bull run.

Defensive stocks may be found in several market sectors, but they are most often concentrated in consumer staples, utilities, healthcare and real estate, and are usually large companies with strong brands which include household names like Johnson & Johnson (NYSE:JNJ), The Procter & Gamble Company (NYSE:PG), The Coca-Cola Company (NYSE:KO) and Exxon Mobil (NYSE:XOM).

Forex

Forex trading involves trading pairs of CFDs on currencies in order to make opportunities from one currency’s strength relative to another. During a recession, the rate at which different currencies strengthen and weaken against each other may increase, creating opportunities.

For instance, in July 2022, inflation fears saw the US Dollar surge to a 20-year high, putting it on parity with the Euro. Similarly, the Japanese Yen fell to a 24-year low against the Dollar[2]. These dramatic currency movements no doubt provided substantial opportunities for forex traders who managed to make the right trades.

Besides the US Dollar, other strong currencies to hold in a recession include the Singapore Dollar and the Swiss Franc which are relatively stable and resilient even during the Covid-19 pandemic.

Another way to consider trading in forex during a recession is to go long on a weakened currency CFDs.

Commodities

Commodities are raw materials that are required to keep the economy going.

There are four main types of commodities[3] – agricultural products, livestock, metals and energy products – offering different trading opportunities during a recession.

The first two are classified as “soft commodities”, and due to their perishable nature, they cannot be stored for long. As such, when demand drops during a recession, the value of soft commodities is likely to decline as well, creating opportunities for short selling.

In contrast, metals and energy products are termed as “hard commodities”. Commodities such as iron or coal can be stored for long periods without complex or expensive equipment, which means there is less pressure to sell off existing stock. As such, hard commodities tend to hold their value much better than soft commodities during a recession.

This is especially true for commodities that are considered stores of value, such as gold, silver and palladium. Prices for these commodities usually increase as more investors start buying them up, earning them a reputation as recession proof assets.

Indices

Because market indices track a basket of different stocks, they could be used as part of a hedging strategy during a recession.

This involves trading an index against your portfolio.

Conclusion: Make the best of your assets during a recession

Trading during a recession can be counter-intuitive, but as we have discussed in this article, there are opportunities for value to be captured.

The key lies in knowing what tools to use.

As CFDs allow investors to enter both short and long positions, traders use them to potentially create opportunities from movements in the market in both up and down directions.

Another advantage of using CFDs is that they are available for commodities, equities, indices and other popular asset classes, giving traders wide access to many markets.

Learn more about trading CFDs here.


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References

  1. Investopedia, Defensive Stock,  https://www.investopedia.com/terms/d/defensivestock.asp
  2. Financial Times, Dollar Surges And Stocks Tumble As Traders Weigh Global Growth Outlook, https://www.ft.com/content/07cbb91a-5e68-45da-a796-d800cfaf9a2f
  3. The Motley Fool, Commodities Trading: What Is It?, https://www.fool.com/investing/how-to-invest/stocks/commodity-trading/

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