I recently started working in an Investment Bank. And over the last one year, have had the opportunity to witness an event that may well describe our age. The credit-crisis have changed the shape of the world, and if not the Great Depression, this is at least comparable to the 9/11 attacks on the US.
Here are my learning from this recession:
1. Recession doesn't end very early, whatever be everyone's prediction about the state of the world markets, it does last for some time, sometimes for years. It may take us another 12 months to get to the end of the current one.
2. During recession, there are common themes which would always make money. One should be long the defensive sectors like FMCG, Pharmaceuticals, and be short the leveraged sectors like Real Estate, Banking, etc. Cash is king in these times, and sectors/companies with lower Debt/Equity ratios tend to outperform the rest.
3. At the onset of recession, rates usually move up - mostly caused by high levels of inflation. As recession deepens, central banks come into the picture, and start cutting rates. It might be a good idea to wait for rates to go up to 12-13% and then put some money into debt paper.
4. Oil and Gold perform very well during recessionary periods. One of the prime reason is flight to quality - these are commodities, and not paper certificates. Another reason is their link to inflation. Higher the inflation, higher the commodity prices. Hence, inevitably, most of the recessions are marked by rise in price of commodities.
5. Financial Sector is amongst the worst performers in a bad economy. The higher interest rates lead to de-leveraging, and lesser credit in the system. All this has negative effect of the banking system.
6. Big Caps always outperform the Small Caps, primarily because of the flight to quality syndrome. Another reason could be that during tightened credit conditions, small companies find it harder to raise debt, and their costs of funding soars higher.
7. Futures trade at lower premium (and even discounts) during Bear markets. This is simply due to huge shorting in index and stock futures by speculators as well as portfolio managers.
Here are my learning from this recession:
1. Recession doesn't end very early, whatever be everyone's prediction about the state of the world markets, it does last for some time, sometimes for years. It may take us another 12 months to get to the end of the current one.
2. During recession, there are common themes which would always make money. One should be long the defensive sectors like FMCG, Pharmaceuticals, and be short the leveraged sectors like Real Estate, Banking, etc. Cash is king in these times, and sectors/companies with lower Debt/Equity ratios tend to outperform the rest.
3. At the onset of recession, rates usually move up - mostly caused by high levels of inflation. As recession deepens, central banks come into the picture, and start cutting rates. It might be a good idea to wait for rates to go up to 12-13% and then put some money into debt paper.
4. Oil and Gold perform very well during recessionary periods. One of the prime reason is flight to quality - these are commodities, and not paper certificates. Another reason is their link to inflation. Higher the inflation, higher the commodity prices. Hence, inevitably, most of the recessions are marked by rise in price of commodities.
5. Financial Sector is amongst the worst performers in a bad economy. The higher interest rates lead to de-leveraging, and lesser credit in the system. All this has negative effect of the banking system.
6. Big Caps always outperform the Small Caps, primarily because of the flight to quality syndrome. Another reason could be that during tightened credit conditions, small companies find it harder to raise debt, and their costs of funding soars higher.
7. Futures trade at lower premium (and even discounts) during Bear markets. This is simply due to huge shorting in index and stock futures by speculators as well as portfolio managers.
