Trading During a Recession – What Do You Need to Know?

The economic landscape in the UK is a dire one, as months of instability and hardship for businesses and families alike steer the nation towards an inevitable recession. While attempts have been made by the Bank of England to curb the impact of inflation on families, these very attempts are likely to hasten the onset of economic decline.

This news will have profound implications for the majority of industries and markets. But what exactly are those implications? And, as an investor, what are the best approaches for preserving – and even growing – the value of your portfolio during a recession?

Impending Recession

Experts in the UK are anticipating an economic recession, as a result of numerous disparate factors combining to form a perfect storm of instability and decline. The most apparent cause for this recession is the dramatic increase in the rate of inflation to over 10%, itself caused in large part by the stratospheric increase in the cost of domestic and commercial energy.

Meanwhile, the UK’s withdrawal from the EU has introduced new and expensive barriers to trade, increasing wholesale and import costs for small businesses and impacting profits across the board. As markets and households alike struggle to absorb rising costs, the pound shrinks with respect to the dollar – and the economy, too. threatens to shrink.

The Impact on Markets

A recession is typically defined as a period of negative economic growth – more specifically, heralded by two successive financial quarters of falling GDP. The essential mechanism behind this definition is spending; if consumers and businesses alike spend less, profits fall, followed closely by output.

With regard to the various markets on which assets and investments are traded, the overall impact is a blanket reduction in the value of assets and investments. Even in the foreign exchange market, the pound has fallen with respect to the dollar – though this is less directly related to recession, and more a harbinger of poor economic performance.

Key Tips for Recession Trading

But even with the value of shares destined for near-universal decline, there are still opportunities to utilise the markets for inflation-beating returns. For the individual investor who doesn’t have the liquid cash to purchase stable assets, CFDs can be a useful instrument for leveraging market movements without buying outright. By correctly reading the downturn, investors could use short positions to predict a fall and profit from asset devaluation.

It is also possible to use economic recession for long-term financial stability. The devaluing impact of the recession will see shares affected holistically – even businesses with the strongest long-term outlook will suffer falls in share price. By treating this fall as a ‘discount’, investors can take long positions on devalued shares and reap the long-term rewards after the economy rallies.

As far as holding stock is concerned, the biggest mistake an investor can make is to sell. Value will return to investments, provided the businesses in which you are invested do not fold from economic pressures.