Investing during a recession: which assets should you invest in?

During uncertain times, many people may be worried about the possibility of a recession in the UK and its impact on their savings and investments.

We explain what a recession is, what it means for your money and how to invest.  

What is a recession? 

A recession is a prolonged and notable reduction in a country’s economic activity.

A recession typically happens after negative gross domestic product (GDP) is revealed in two consecutive quarters.  

Once a recession begins, it usually lasts for at least a few months, but often, a full economic recovery takes years.

It can happen for various reasons, from uneven supply and demand to a big world event. 

The UK has experienced numerous recessions, from the 15th century Great Slump to the damaging Global Financial Crisis of 2008 to 2009, otherwise known as the Great Recession. 

In September 2023, the UK Purchasing Managers’ Index revealed the sharpest month-on-month fall in private sector activity, excluding the pandemic, since the Great Recession. 

While the UK is expected to avoid a recession, it can be useful to understand how to invest if it happens in the future.  

Learn more: What does a UK recession in 2024 mean for your finances?

What would a recession mean for your finances?

The impact of a recession on your money largely depends on your financial situation. 

When economic growth slows, and there’s less money to spend, many things can happen, including: 

• Many businesses, especially small and medium-sized enterprises (SMEs), will struggle.
• Self-employed sole traders may also struggle.
• The value of investments potentially falling if stocks and shares decline.
• The chance of being made redundant increases, as does the prospect of no pay rises.
• Banks tighten their lending criteria, making approval for loans more challenging. 

How to invest in a recession

If you plan to invest in a recession, you should be aware of the risks and be conscious of your financial situation. 

Below are seven tips that can be useful when investing, although it’s also worth talking to a financial adviser if you need help planning an investment strategy and fully understanding the potential risks. 

1. Never prioritise investing over building an emergency fund to protect you and your family.
2. Since a recession will likely push down the price of many stocks, you can take advantage of cheaper share prices if you’re financially able to and confident in the company’s future.
3. If you have any investments, carefully consider whether selling is the right move, as you may be able to benefit from long-term gains.
4. Make your portfolio of investments as diverse as possible so that the risk is evenly spread and the potential for extreme financial loss is lowered.
5. Pay attention to any investing fees and consider switching from active management strategies in favour of passive, longer-term strategies during the recession.
6. Look out for companies and sectors that do well in a recession. Even if you don’t have the funds to invest, you can research these as potential investment opportunities in the future.
7. Focus on recession-friendly investments, which we’ll now explore.  

Are there any ‘recession-proof’ investments?

There are no truly recession-proof stocks or investment options since a recession comes with much financial uncertainty. 

There are, however, some investments that are safer than others. 

You should consider options that aren’t too highly leveraged (that have low debt compared to asset value). 

Some of the areas below may be worth considering, but it’s a good idea to get financial advice before investing

What to invest in during a recession

• Consumer staples: Some of the best stocks to buy in a recession focus on everyday goods and services, such as groceries or healthcare products. Sometimes called ‘recession stocks,’ the performance of these assets is unlikely to be as affected as luxury goods providers.
• Technology: Digital industries tend to be more adaptable during periods of economic difficulty.
• Precious metals: Tangible precious metals like gold and silver are relatively good at holding their value.
• Property and real estate: Properties are often considered one of the most stable asset classes. Though you’ll see some impact during a recession if you’ve invested or are planning to invest in this area, it’ll likely remain more stable than many alternatives. 

Areas to avoid when investing during a recession

There are some investment options you’d be better off avoiding during a recession. 

It’s worth exercising some caution if you’re considering cyclical stocks, speculative stocks, high-yield bonds, shares in companies with more debt than equity and firms offering luxury goods and experiences. 

Preparation is key

While it’s impossible to prevent a recession, it is possible to minimise its impact on you and your finances by being prepared. 

It’s worth having an emergency savings fund and reviewing any investments.  

If you want help with your finances, are considering investing or want to review your strategy, Unbiased can connect you with an FCA-regulated adviser.