Global Economic Recession
What are the causes of economic recession?
What is a global economic recession? It is a recession that extends beyond national borders and affects the global economy.
A technical recession definition for a country is 'two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP)'.
A significant decline in economic activity occurs, usually lasting longer than six months and affecting industrial production, employment, real income and trade.
An inverted yield curve is an important predictor of recession. It indicates that investors are looking for higher yields on short-term bonds than on longer-term bonds.
What Causes a Global Recession?
A single crisis can often trigger the onset of a recession.
The International Monetary Fund (IMF), who regard global growth less than 3% as a 'global recession', has classified recessions by their main causes.
These include ...
- financial crises - like the 2008-2009 global financial crisis
- oil shock
- external demand shock
- monetary policy tightening or fiscal policy contraction.
Those caused previously by financial crises were described by the IMF as 'more severe and longer lasting than recessions associated with other shocks'
And they further asserted that previous global recessions 'have been longer and deeper than those confined to one region'.
That tells me something about the 2008-2009 recession!
A recession generally lasts from six to 18 months, and interest rates commonly fall during this time to stimulate the economy by offering cheap rates to borrow money.
How to Survive a Recession
How can you use a value investing approach to go about recession investing, or more specifically, to survive a recession?
The key from my standpoint regarding recession planning is to look for recession proof businesses.
As the recession cycle plays itself out, as it is in the recent global financial crisis, I look for businesses that know how to survive a recession.
What might the characteristics of such businesses be?
For starters, businesses with low to zero debt must be preferred in a recession environment - particularly like the recent one.
Or if indebted, a business must have the capability to undertake a successful capital raising to keep its creditors at bay, or have sufficient cash flows.
Not only that, they should also have a history of being able to use capital wisely.
And secondly, the company should have a history of strong profitability as measured by its return on equity.
Looking Beyond the Recent Recession
A further consideration is to look to the future to see whether the company or companies are positioned to profit from the recession.
China and India will be the new key players in this post-recession world with a massively growing middle class who will be consuming more and more goods and services.
I will be looking to tap into this growth, directly or indirectly, via domestic consumer staples companies who have moved, or are moving off shore into these areas.
Regional mutual funds or managed share funds with a value investing approach that are capable to access that growth will be another option for me to consider.
So recession planning is a key element in surviving a recession such as the current global economic recession.
The related articles below examine the importance of each of the suggested measures in more detail.
An inverted yield curve
- is an important predictor of economic recession. Check out why!
Capital raisings - are an important way in which companies can recapitalize during a recession, but not always for the benefit of a value investor. Why not?
Return on equity - is the measure of profitability that companies can't hide from. It is an important instrument for investors following a value investing approach to use when assessing what damage a recession has caused a company.
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