Booms and busts are part of the normal cycle for every economy but hardly anyone loves a recession.
Unfortunately for Nigeria, it is imminent this year and many are expected to lose their source of income, investments and assets too. This will cause demand or spending to drop and firms to shut down, downsize or cut wages leading to lower income and outputs for a period, some economists predict.
Nonetheless, one thing usually not associated with recessions is the creation of wealth.
As economic activities slow, prices typically fall allowing savvy investors purchase assets and make investments that would grow in value when the economy eventually recovers.
For instance, if you had invested in Nigerian stocks during the 2016 recession, you would have earned over 40% returns by end of 2017, when the economy rebounded.
Read also: Investors brace up for turbulent week as risks to stocks’ rally remain
This strategy has proven wise for investors like Warren Buffet, who during the 2008 financial crisis, announced plans to buy US stocks despite falling prices.
Today, his advice to “be fearful when others are greedy, and be greedy when others are fearful.” still rings true.
This is because while everyone else is selling off during a recession, it usually is a good time to jump on attractive discounts and cheap valuations of fundamentally sound assets – without throwing caution to the wind.
Investments in real estate (like in the hospitality class), gold, stocks and perhaps bitcoins might be unnerving but many times, patient investors get rewarded for buying dips in the markets.
The prevalent thought during hardships is for people to sell their properties or assets to generate cash thereafter save the proceeds (people become prudent during downturns) but these should be replaced with buy/invest startegy for savvy investors.
When the economy starts recovering people will tend to “redeem” assets they had lost or sold during downturns and that’s when the value begins to rise for the new property or investment owners.
Today, the Sovereign-Wealth Fund of oil-producing Saudi Arabia is doing the same spending $7.7 billion dollars on shares of the world’s best companies (Disney, Citibank, Boeing, Bank of America, Facebook etc) amid a global crisis that chopped down oil prices and weakened demand.
It is noteworthy that not all shares or financial assets will perform well during a recession; the outbreak of the Coronavirus and social-distancing measures being adopted will also have unique effects on businesses. This is why consulting with your a financial advisor or investment expert will prove essential.
Disclaimer: This article not an advice to buy, sell or hold any asset.
Also for economies like Nigeria where many businesses rely on dollar, period of downturns could see inflation surge.
