Author: AtlanticIS

United States, Mar 25, 2020 – The U.S. economy is falling rapidly into a recession due to the expanding COVID-19 crisis. Since we will only know what industries weathered this recession best when it’s over, we looked back to the last recession for some guidance. During 2008, during the Great Recession, only 34 stocks out of the S&P 500 had positive returns. There are many reasons why these particular stocks increased, and the impact of every economic recession is different. However, looking at which stocks did well can still show broad patterns as to what kinds of stocks may do better in economic downturns.

Discount Retailers

The stock that beat all other S&P 500 stocks during 2008 was Dollar General, rising more than 60% that year, almost double the second highest-returning stock. In fact, the only industry to come up twice in the top 10 best-performing stocks of 2008 was discount stores, with Walmart in 6th place.

This makes intuitive sense as recessions reduce consumers’ income. When consumers’ incomes go down, they can either substitute cheaper goods or buy fewer items. Since there is a minimum of how many staple goods like food and basic household supplies you need to buy, you can’t just cut them from your budget like you could with a new videogame. That means that to save money on them, you will turn to cheaper alternatives. As a result, discount retailers are likely to do well in a recession.

Health Care

If you group together all companies related to the health care industry, there are three in the top 10, more than discount retailers. Furthermore, there are a total of 7 different health care related companies among the 34 that had positive returns in 2008.

The reasoning behind this is clear. You need health care to live and therefore are much less likely to skimp on it even when your income declines. The technical term for this is price inelasticity. Not all health care companies are created equal, and recessions are likely to hurt those companies with more debt and less cash flow. These enterprises have less ability to absorb losses and service their debt at the same time. Therefore, it may be prudent to stick to health care stocks that have low debt-to-equity ratios and avoid biotech startups that are still in their early phases.

Food and Restaurants

Similar to health care, people need food and can only cut spending by so much. Besides discount stores like Dollar Tree and Walmart, which are major grocers, also on the list are a diverse group of stocks. They include packaged food company General Mills, Inc., grocery store chain Kroger Co. (KR), and also restaurant chains McDonalds Corp. (MCD) and Darden Restaurants,Inc. (DRI) (owners of Olive Garden and other casual dining chains). All of these are relatively inexpensive food options, as people tend to purchase inexpensive items like cereal and switch to less expensive restaurants when they dine out.

Freight and Logistics

Goods need to be moved, recession or no. While personal travel for vacations declines during recessions, there is still a need to move goods to stock store shelves. Old Dominion Freight, Westinghouse Air Brake Technologies (WAB), and C.H. Robinson Worldwide (CHRW) all had positive returns in 2008. All of these companies either move freight or make products that help move freight, in the case of Westinghouse. So freight companies are often safe bets during recessions.

DIY and Repairs

When times are tight, one way to cut costs is to repair what you own rather than replace it, and to do routine maintenance yourself. That may be the reason for the strong 2008 performance from auto parts retailer AutoZone Inc. (AZO), and also from home and garden improvement retailers Tractor Supply Co. (TSCO) and Sherwin-Williams Co. (SHW). During a recession, consumers are more likely to repair their cars rather than buy a new one, as well as do home improvement and garden work themselves.

The Bottom Line

The above list isn’t exhaustive, as investing during an economic downturn is an enormous topic. Other areas that are traditional defensive investments are utilities (people always need water and heat), and personal storage (a place to put things when downsizing). That said, this should give you a good place to start looking for how to invest during a recession. Good things to keep in mind are what goods and services people and business can easily live without and what ones are essential. In addition, keep in mind what businesses people may patronize more if their income decreases.

As mentioned, it’s important to remember that each recession is different, and so will the stocks that do well during them. For example, a lot of biotechcompanies are rising at the moment due to the widespread COVID-19 crisis. Financial firms were devastated in the 2008 recession, because it stemmed from a financial crisis, but it’s energy companies in 2020 are among the worst performers due to the current oil price war.

One final reminder is that stocks and industries that do well during a recession may not always do well when the economy recovers. So you will need to change your investment strategy when the good times return. Keep that in mind when building your portfolio

http://www.investopedia.com/articles/stocks/08/industries-thrive-on-recession.asp

Mexico, March 12, 2020 – Global benchmark oil prices plunged for the second time in a week on concern about a price war stemming from Saudi Arabia’s plan to increase output despite signs of flagging global demand. The benchmark Mexican price (Mezcla Mexicana) declined to $23.58 per barrel, a 34% drop since the end of the previous week that left the price well below the $49 per barrel price embedded in Mexico’s 2020 federal budget assumptions. The price shock will weaken growth in certain federal transfers to Mexican regional and local governments (RLGs) that are funded in part with oil revenue, a credit negative. Nonetheless, the sector will benefit from contingency funds and hedging contracts in 2020, softening the financial effect in the sector through the end of the year.
Non-earmarked federal transfers (participaciones) account for slightly more than a third of total revenue among Mexican states, and while these transfers are mostly funded with federal tax collections, they also rely on oil revenue that flows into Mexico’s Oil Fund for Stability and Development. Without a global oil price recovery, and given expectations that production will not rise significantly this year, oil revenue will likely decline in 2020, creating modest financial pressure for RLGs as slowing economic growth creates other headwinds in the sector.
After Mexico’s GDP contracted 0.1% in 2019, we expect GDP will rise just 0.9% in 2020 and that slow growth will weaken other tax collections that also fund federal transfers. Even before the oil price shock, the government projected just 3.9% nominal growth in participaciones in 2020, well below the 8.5% average growth rate during the previous five years.
We estimate that in a scenario in which prices fail to recover throughout the year, growth in participaciones would be lower than the 3.9% rise projected in the budget, though certain offsetting factors will help limit the shortfall. For one, dependence on oil revenue among Mexican RLGs has declined in recent years. Between 2012 and 2014, for example, oil revenue accounted for 29% on average of total revenue that funded participaciones, versus 12% on average between 2017 and 2019.
In addition, lower oil prices will give Mexico more flexibility to eliminate for the rest of the year a fiscal stimulus that previously applied to a federal excise tax on gasoline sales (IEPS)1 – another revenue source that funds participaciones – which will help offset the drop in oil revenue2. In periods where rising oil prices lead to increases in the price of refined fuels, the government has applied a stimulus that effectively subsidizes the IEPS tax with the goal of smoothing price increases for consumers. Conversely, when oil prices fall the government is able to reduce the subsidy, resulting in a rise in IEPS collections. The government’s budget projects a 17% increase in the IEPS tax on gasoline in 2020 (see Exhibit 1).

Although we anticipate slow growth in participaciones from lower oil prices, Mexican RLGs will nonetheless benefit from the Fondo de Estabilización para los Ingresos de las Entidades Federativas (FEIEF), a contingency fund, which will make up for any shortfall between budgeted and actual participaciones in 2020. This will help alleviate stress for RLGs this year, but would leave a smaller buffer to absorb future shocks (see Exhibit 2). The FEIEF currently has enough resources to absorb up to a 6.4% decline in participaciones from the levels budgeted for 2020.

Finally, other federal transfers that are earmarked primarily for infrastructure projects will likely benefit from the federal government’s hedging contracts, which on average provide coverage against a drop below $49 per barrel. These hedges will insulate the federal government’s budget overall from the oil price shock, allowing it to continue sending the earmarked transfers, which accounted for approximately 12% of total revenue among Mexican RLGs last year. Stability in these transfers will help limit financial stress for RLGs. Nonetheless, revenue provided by the hedging contracts does not cover participaciones, which are only funded with tax and oil revenues, and therefore wouldn’t benefit from any gains from a hedging contract.

Credit Outlook: 16 March 2020. Pg. 46
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