Everything millennials need to know about a recession

Staci West 23/07/2020 in Millennials

Raise your hand if you’ve heard something like: “The UK is facing its deepest recession yet” or “Looming recession means tough choices ahead.” You can’t see me but, as I’m typing, I’m mentally raising my own hand and also thinking: “okay… and?” Most younger millennials won’t have gone through a recession before, so these headlines can be extremely intimidating and scary – as can the accompanying stories about company insolvencies and job losses. However, as with most things in life, the more you understand a problem, the more you can do about it. Here’s everything you need to know.

“I’ve heard there’s going to be a recession. I’ve decided not to participate.” – Walt Disney, 1929

What is a recession?

Countries measure their economic health by measuring the total value of the goods they produce and the services they provide. This is known as Gross Domestic Product (GDP). A recession is a period of economic decline, when GDP falls for six consecutive months or longer.

How does a recession impact my job?

In a recession there will be job losses and unemployment will rise. This is because, in a weakened economy, we as consumers typically spend less money. This is bad for business as we buy fewer goods and use fewer services. It can result in redundancy and stagnant wages.

Because the government forced companies to shut down during the pandemic, the furlough scheme was introduced in the hope that it would limit the number of job losses. But in his recent ‘Plan for jobs’ mini-budget, the Chancellor also announced a Job Retention Bonus and a plan to create new ‘green’ jobs. There were also incentives to get Generation Z into the workforce.

How can I prepare for a recession?

All recessions are different, and yes, this recession will be unique and depend on your personal situation. But there are three important things to consider: your emergency fund, debts and savings.

Now is a great time to pay attention to your emergency fund and top it up if necessary. Then if your salary is cut or you do face redundancy, you have something to fall back on. Next is debts and credit cards. Banks tend to reduce their lending activity during a recession, so cut down on non-essentials. While we’re all looking for a post-lockdown holiday, don’t spend money on anything you can’t afford. Finally, sharpen up your money habits. For some, lockdown will have resulted in more spare savings. Put that money to work either in your emergency fund or, if you can, put that money towards any high-interest debt or look to consolidate. That way, if money’s tight, you won’t be forced to rack up more debt.

Should I invest during a recession?

Recessions and bear markets often go hand in hand…at least for a while. But remember, stock markets can move very quickly and, while they may react immediately to news, you don’t have too. When investors are worried, the knee-jerk reaction can be to move all their money into cash. But this can often be a mistake. While you could miss some of the market falls by moving into cash, you could also miss some of the profitable bounce-backs.

Steven Andrew, manager of M&G Episode Income, explained behavioural finance and why human emotion can impact stock markets in a recent podcast episode.

Less risk averse investors may also like to top up their investments when markets fall – if you can stomach the ups and downs, the downs can often be a good time to invest as assets are cheaper.

Is now a good time to buy a home?

Low-interest rates and a bourgeoning population mean a lot of people are in the market for new homes. But when times are tough, fewer people are typically able to afford a new mortgage which could lead to less competition for homebuyers and lower prices. The pandemic has caused some would-be sellers to stay put but there are opportunities. If you were already looking to move and still can do so, now might be a good time in the UK as the Stamp Duty threshold is changing temporarily to encourage movement on the housing market.

Can’t afford to move? You could consider investing in property instead. In one of our first ever podcasts, Alan Collett, manager of TM home investor, explained how the UK housing market is surprisingly resilient during recessions. TM home investor invests solely in residential property across the UK.

How do I recession-proof my investments?

There are a number of different ways to invest during a recession depending on your risk profile. You could choose to be defensive and shift into more defensive funds like SVS Church House Tenax Absolute Return Strategies or BMO MM Navigator Distribution – both of which aim to preserve capital. Rob Burdett, co-manager of BMO MM Navigator Distribution fund told us this week how the fund has shifted out of equities into more corporate and high yield bonds.

Another option is to invest in companies which should prosper no matter what’s going on in the economy. We recently looked at whether fast food is a recession-proof investment following the global lockdown. Other options could include the pet care industry or technology. A few funds that use this tactic are Liontrust Special Situations, Lazard Global Equity Franchise, Morgan Stanley Global Brands and Scottish Mortgage Investment Trust.

If taking the ‘opting out’ approach I mentioned at the start of this article, you might consider M&G Optimal Income which recently bought a new bond issue from Walt Disney*, or ES R&M UK Recovery which owns Walt Disney shares**.

Of course, you could do nothing. Millennial investors benefit from a long time horizon if nothing else, meaning you can sit out the ups and downs of the stock market and ignore the noise.

*Source: Fund fact sheet, 31 May 2020
**Source: Fund quarterly update, 30 June 2020

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