Recent bank failures have added to widespread discussions about an approaching period of economic unpredictability on a global scale.
Although it is difficult to predict exactly what the future holds for the market, there is a need to continue to account for lessons learned from the economy’s historically cyclical model, argues Simon Calton, founder and CEO of the Carlton James Group, a private investment group that specialises in investments during economic downturns.
With the telltale signs of an impending recession coming to light, proactive action is essential, especially for businesses and investors in industries most vulnerable to an economic downturn. While it is nearly impossible to emerge from a recession completely unscathed, there are some crucial steps that can be taken to minimise the fallout and help stay afloat during difficult times.
Calton lays out four basic rules for not only surviving a potential receding market but thriving during uncertain times.
Invest in non-cyclical markets
Calton advises taking a rational approach in understanding which sectors remain steady throughout the economic cycle. Prioritising investments in non-cyclical markets that remain strong, regardless of the economic climate, is a smart move.
For example, keep real estate assets on the backburner, while exploring investments in essential areas such as energy or healthcare, which are defensive in nature and rarely deviate from the economic cycle.
Preserve existing capital
The preservation of existing capital is paramount, according to Calton. This can be achieved through the diversification of investment portfolios, which protect assets overall in the likely event that a few investment pools are negatively impacted by economic fluctuations.
It is important to understand that all losses are paper losses until crystallised. For example, if you had sold property in 2009 in the US you would have crystalised the loss in that property. However, if you had held on to that property through those years and then sold five years later, this loss would have been negated as the property sector swung back in its cyclical manner.
Prioritise investments in efficiency
Continued strategic investment in the right technology is critical, Calton advises. While putting money into emerging technologies is exciting, the potential ‘big payoffs’ associated with shiny, new ideas are less likely to come to fruition in light of unpredictable economic conditions, so it is important to know what kinds of emerging tech will thrive.
Investments in services that increase efficiency, and ultimately decrease time and money expenditures, are most successful during a recession. The efficient technologies that can sometimes be ignored in a strong market will be called upon once companies, countries and the general public have a need to reduce their bottom line and increase their profitability.
Learn the differing signs of a recession
Various markers can provide advanced awareness of an economic recession. Understanding the key markers of an incoming dip in the economy can help stakeholders stay ahead of the curve and prepare for decline.
Inflation and interest rates are prominent topics in this area; however, there are additional indicators that can deepen understanding of recession indicators. Closely monitoring employment rates, new building permits, consumer spending and, most obviously, the health of the financial and banking industries, is the best way to maintain a full picture of the state of the economy.
These are the four tactics to endure a recession by working with the circumstances presented, instead of engaging in a losing battle by attempting to outrun them. Understanding how the economy behaves and leveraging its cyclical tendencies instead of fighting them can help businesses and investors survive or even thrive amid a recession.