Recessions can bring periods of significant upheaval for investors, but what side effects should you take into account when adapting your strategy?
The investment landscape has been turbulent for some time, with markets shifting momentum repeatedly in recent years owing to a post-pandemic recovery, rising inflation, an artificial intelligence boom, and, more recently, tariff-related uncertainty.
With the United Kingdom’s growth forecasts from the International Monetary Fund (IMF) suggesting that a slowdown to 1.1% is on the cards for 2025, down from 1.6% last year, it appears that the prospect of a recession is slowly becoming more plausible.
But what does this mean for investors? Let’s explore seven uncommon side effects of recessions that UK savers should watch out for:
Low Inflation, Low Interest Rates
Generally speaking, recessions are deflationary for economies. This is because weaker consumer spending power typically means widespread cost reductions on goods and services.
For investors, this can be troubling because stocks and shares may experience slower growth while the UK economy, in general, is likely to struggle to regain any momentum.
It also means that investors need to be mindful of a dovish approach from the Bank of England when it comes to interest rates. Central banks tend to lower interest rates to encourage more borrowing from consumers and businesses alike. However, this can also mean that fixed-rate savings accounts and Cash ISAs offer lower yields to savers.
With this in mind, it could be more effective to buy stocks and shares ahead of a possible market recovery. One of the many advantages of ISA saving is that investors are handed a £20,000 annual tax-free allowance, meaning that you can maximise your income potential even when markets grow at a slower rate.
Not All Sectors Suffer
Recessions carry an uneven impact on the stock market, and it’s entirely possible for investors to find resilient stocks even as wider markets contract.
Notably, sectors that produce goods and services that are essential for individuals typically offer higher levels of resilience in the face of recessions.
This means that investors with stock and share portfolios could benefit from adopting a more diversified outlook and by incorporating resilient sectors like healthcare, utilities, and consumer staples.
History Favours Long-Term Outlooks
Although recessions are associated with negative stock market performance, history has consistently shown that long-term investments rarely suffer from downturns for long.
In the 21st Century, the United Kingdom has already experienced three recessions, with the 2008 economic crash spanning more than a year. Despite this, the FTSE 100 had almost recovered all of its losses by May 2013, highlighting the pace of market recoveries from challenging economic conditions.
Since 1957, the S&P 500 index has offered an average annual return of more than 10%, which highlights the long-term value that stocks and shares provide investors, even if short-term challenges impact portfolio performance.
Risk-Tolerance Changes
Recessions don’t just affect your investments, they can significantly impact your lifestyle and economic comfort. With this in mind, your risk tolerance is liable to change based on your day-to-day liquidity.
You may find that the investments you made prior to the recession no longer suit your financial goals. It may even be the case that you need to switch to a more easy-access investment strategy in case you need more money fast.
In a recession, it’s worth regularly auditing your investments to check that you’re still comfortable with the risk that you’re taking on.
Stock Fundamentals Change Fast
Recessions have a knack for weeding out more speculative stocks with unsustainable business models. However, history shows that markets recover from economic downturns, but not all stocks do.
The biggest way of losing out in a recession is the permanent loss of capital where you’re unable to recoup your losses. If you hold low-quality investments that can go bankrupt in a downturn, you’re at significant risk of losing out on your investment.
With this in mind, be sure to critically look at your stocks and spot signs of strain, such as staff layoffs or weaker-than-expected earnings, as a possible red flag.
Alternative Investments May Hold Value
Another strategy to find resilience in a recession is to invest in an asset that’s entirely removed from financial markets. Because stocks are heavily impacted by a recession, many investors look to commodities like gold as a safe haven investment or collectables as a means of storing their wealth.
Because art is uncorrelated with stocks, your investments are unlikely to decrease in value at the rate of more traditional strategies.
Crucially, data shows that contemporary art has generally appreciated at a faster rate than both the S&P 500 and gold during periods of market uncertainty, such as instances of high inflation, illustrating how they can deliver stronger performance in adverse circumstances.
Access to Credit Could be Impacted
Because increased financial uncertainty puts added strain on institutions, investors may find that their access to credit could become more difficult during a recession.
Lenders may take a proactive approach to navigating volatile markets by raising their lending requirements, making it more challenging for individuals to qualify for new credit accounts. This may impact your investment strategy if you’re concerned about your access to credit, and switching to more flexible accounts could be a useful measure to avoid short-term economic concerns.
Finding a Sustainable Approach
Recessions can bring widespread uncertainty to investors, but it doesn’t have to spell the end of your strategy.
Finding resilience amid uncertainty is an essential way of overcoming the financial constraints you may be facing in a recession. Adopting a more hands-on approach to revising your investments and the businesses you’re exposed to can also help prevent any unwanted surprises in your portfolio’s movements.
Sustainability should be your priority in a downturn. Fortunately, measures like diversification, reassessing risk tolerance, and seeking resilient investment strategies can form the cornerstone of investing success in the midst of a recession.
