How to safeguard your finances in a downturn
It’s time to pay off debt and invest in consumer staples, advise Lauren Almeida and Charlotte Gifford
Arecession can have a devastating impact on people’s everyday finances, as a weaker economy can lead to salary cuts, redundancies and a decline in confidence and financial security.
To weather a recession, first pay off any debt and build up cash. All economies go through natural cycles of expansion and recession. In the event of the latter, try to pay down any expensive debt that you may have, such as credit cards, as borrowing may become more expensive. If you have several debts, address the borrowing with the highest interest rate first, and then move on to the next.
If you do not have enough cash to pay down your debt, see if you can move to a cheaper rate – a balance transfer credit card can be useful for this. This can only offer temporary relief, but will give you more time to organise your finances and stop your debt from growing as quickly.
If you have money left over, you should also try to build an emergency cash fund. This can help protect you from any unexpected bills or expenses, or even help you cope with a period of unemployment that could come with recession-related redundancies. Putting aside three to six months’ worth of your average expenses is a good rule of thumb – but make sure it’s in an account that offers penalty-free instant access, so you can withdraw it whenever you need to.
Any extra cash could do well in a fixed-term savings account – particularly if you manage to get one soon, while the best rates still top 5pc.
News of a recession could see savings rates drop further, and soon, according to Dean Butler, of Standard Life: “The most immediate impact is likely to be retail banks pricing in an expected cut to the Bank Rate, as the fact we’re officially in recession will heap pressure on the Bank of England to start to change their position. Now is a good time to shop around for the best rate before rates possibly fall further.”
It is also important to keep investing for the long term. As stock markets can dip during recessions, it might seem counter-intuitive to keep investing, but it is often a good time to get started. If you are not investing a small amount monthly, now may be your chance.
So far, the UK stock market has shown no signs of decline linked to the recession. “It’s notable that the FTSE 100 reaction, following the news of the economic contraction, was in fact positive,” said Laith Khalaf, at stockbrokers A J Bell. “The market is probably more focused right now on when the first interest rate cut will come, and a recession makes that more likely to be sooner rather than later.”
If there was a drop akin to the 2008 financial crisis, and assuming share prices have fallen as a result, you could try “buying low”, in the hope that they grow in future, or put your money into goods and services that tend to do well during recessions. However, you should only consider doing so if you already have a healthy emergency fund in place and are comfortable with the possibility of losing money.
Jason Hollands, at the broker Bestinvest, said: “While recessions are undoubtedly painful for the real economy, they increasingly prompt the sorts of actions that end up being very positive for investors.”
A recession calls for a more “defensive” investment style, which means picking stocks to buy and funds that are typically resilient during all points of the economic cycle.
Hollands pointed to the consumer staples sector. While spending usually falls during periods of recession, everyday items such as toilet paper and tea bags rarely suffer as consumers can be relied upon to continue buying them. “Stocks like Unilever, Reckitt Benckiser and Procter & Gamble would fall in this category, each of which owns vast ranges of household brands,” he said.
The Evenlode Global Income fund has about a third of its fund invested in consumer giants such as Unilever and Nestlé, and has delivered returns of 17pc over the past three years.
Hollands also pointed to Lindsell Train UK Equity. It is invested in big brands such as the drinks manufacturer Diageo, and has gained 23pc in the past five years.
Liontrust UK Growth is another option, which holds positions in the pharmaceutical giants Astrazeneca and Glaxosmithkline. Hollands said healthcare was historically a resilient sector during recessions.
Alternatively, if the whole market is depressed, one simple option could be investing in a tracker, where you’ll have exposure to a wide range of stocks at low prices.
‘Recessions increasingly prompt the sorts of actions that end up being very positive for investors’