Investing in a recession: 5 moves investors should make now

As the Bank of England hikes interest rates again, there is a chance the UK may head into recession. Here's what you need to think about to shield your investments from a potential recession

Computer screen with a rising chart on it
(Image credit: © Getty Images)

The UK may have avoided a recession just last month but economists are warning a downturn is now looking likely due to further interest rate rises and higher mortgage pricing.

The Bank of England had predicted a lengthy recession in November but was more positive about the UK’s economic outlook in May, prompting the International Monetary Fund to even predict last month that the UK economy would avoid a downturn.

Inflation has remained stubbornly high at 8.7%, surprising analysts who expected it to slow.

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That has sparked the Bank of England to shoot up interest rates to 5%, with ore hikes expected next year.

This will make borrowing more expensive for everything from loans, credit cards and mortgages, piling pressure on businesses and consumers.

Mortgage lenders have already begun removing and repricing products, with average rates on a two-year fix moving above 6%.

The extra pressure on consumers and the economy increases the probability of a recession, Jagjit Chadha, director of the National Institute of Economics and Social Research said on Twitter.

One of chancellor Jeremy Hunt’s economic advisors, Karen Ward of JP Morgan Asset Management, also told Radio 4: “The difficulty for the Bank of England – I mean, no-one envies them their job at the moment – is they have to therefore create a recession.

“They have to create uncertainty and frailty, because it’s only when companies feel nervous about the future that they will think ‘Well, maybe I won’t put through that price rise’, or workers, when they’re a little bit less confident about their job, think ‘Oh, I won’t push my boss for that higher pay’.

“It’s that weakness in activity which eventually gets rid of inflation.”

Investors may therefore be asking how best they can recession-proof their investments.

1. Diversify your portfolio

Diversification is of course important, but a well diversified portfolio could serve you well during a recession.

Laith Khalaf, head of investment analysis at AJ Bell, said: “Economic hardship puts pressure on businesses all across the market spectrum and you never know precisely where the cracks are going to appear, so you shouldn’t have too much in any one stock, fund, industry or region.”

Make sure you also keep the number of investments in your portfolio manageable – if you have too many, you may find it difficult to manage and act on time sensitive news like profit warnings, for example.

2. Don’t over-trade

Although you should regularly review your holdings, it is important you don’t over-trade, which could lead to costly mistakes.

“When markets are volatile and losses are mounting, you might be drawn into doing something just to try and exert some sort of control. It’s incredibly tempting to be a portfolio vigilante and take matters into your own hands, distributing some natural justice by petulantly dispensing with investments that have fallen in value. But you should resist that temptation and only make changes based on reasoned considerations rather than on a gut reaction,” says Khalaf.

3. Make the most of your Isa and pension

Make the most of your Isa and Sipp allowances to ensure you are investing in a tax efficient way.

“The annual benefits that are yielded by these simple steps might seem small, but they will compound your returns year in year out, and lead to a bigger nest egg when you come to draw on it. This is especially important given the raft of tax rises we are seeing on earned income, capital gains and dividends over the next few years,” he adds.

4. Don’t ignore dividends yields

Khalaf adds that you should also pay close attention to dividends. “When growth is thin on the ground, dividends can keep your investment scoreboard ticking over. Poor economic conditions aren’t great for profits and hence dividends, but many companies used the shock of the pandemic to cut their regular shareholder payouts and reset them to much more affordable levels.”

Dividend cover for the FTSE 100 currently sits at 2.36, according to the AJ Bell Dividend Dashboard, the highest level in a decade.

“That means company profits are more than double the amount of dividends being distributed, giving companies a large buffer before they need to start thinking about cutting back again.”

5. Think ahead

“It’s extremely important to recognise that an expectation of future economic conditions is already baked into share prices. Companies which are heavily exposed to under-pressure consumers, such as retailers and travel stocks, have already seen sharp falls this year, while defensive stocks like tobacco companies have had a much better ride,” Khalaf adds.

“The market is always looking ahead and though it might sound strange, now is probably a good time for investors to be anticipating better economic climes, rather than fretting about the current malaise.”

Times of downturn can pave the way for opportunities that may not have been accessible during a bull market, says Bill Nixon of Maven Capital Partners.

“The best value is often available when confidence is low or capital is in short supply,” says Nixon.

“Instead, when buyers of assets are exuberant and capital is plentiful, that naturally drives higher prices – until there is an equally natural correction.”

“Even in a time of economic contraction, the core principles of investing remain the same. Of course, prices will vary depending on market forces and conditions, but quality will always have the upper hand.”

He suggests technology and cybersecurity, consumer staples and healthcare tend to do better in economic downturns while non-essential, cyclical areas may suffer such as tourism and retail. 

“The same goes for highly-leveraged companies,” adds Nixon.

“As well as already struggling to sustain their debt payments, these businesses might face a decrease in revenue, on top of a wide range of other challenges brought about by the recession.  

Khalaf says it might be a good time to start thinking about drip feeding money into the market, in recognition of the fact that the global market may yet have further to fall.

“While the UK recession is forecast to be long, it’s also expected to be shallow, so companies will be trading into an economy that is going down a slight slope rather than plunging off the edge of a cliff. That still gives good companies the ability to grow. Investors should also take note that their investments are likely only partly in thrall to the UK economy, with many funds and indeed companies on the London Stock Exchange deriving lots of their earnings from overseas. Economic growth in the US and the Euro area isn’t looking particularly rosy either, though they are forecast to do better than the UK next year, according to OECD projections.

It is important to remember that recessions happen and it is normal to have ups and downs, but regularly investing can help smooth out returns.

Kalpana Fitzpatrick

Kalpana is an award-winning journalist with extensive experience in financial journalism. She is also the author of Invest Now: The Simple Guide to Boosting Your Finances (Heligo) and children's money book Get to Know Money (DK Books). 

Her work includes writing for a number of media outlets, from national papers, magazines to books.

She has written for national papers and well-known women’s lifestyle and luxury titles. She was finance editor for Cosmopolitan, Good Housekeeping, Red and Prima.

She started her career at the Financial Times group, covering pensions and investments.

As a money expert, Kalpana is a regular guest on TV and radio – appearances include BBC One’s Morning Live, ITV’s Eat Well, Save Well, Sky News and more. She was also the resident money expert for the BBC Money 101 podcast .

Kalpana writes a monthly money column for Ideal Home and a weekly one for Woman magazine, alongside a monthly 'Ask Kalpana' column for Woman magazine.

Kalpana also often speaks at events. She is passionate about helping people be better with their money; her particular passion is to educate more people about getting started with investing the right way and promoting financial education.

With contributions from