What are Recession Proof Stocks

22 Jun 2022  Read 1335 Views

“Kaanta Lagaa!!!” This is precisely what all the stock market investors might be feeling as they witness their investment returns and principal getting washed away. This prickly thorn in the way of the stock market’s growth is a recession. 
The stock market has steeply fallen to a 13-month low level over the past month (June 2022). It is not just the Indian stock market; the Dow has also fallen to its lowest level since January 2021. 

Indian stocks like Vedanta and Titan have fallen by more than 12 per cents, and 4 per cent, respectively and the mid and small-cap stocks are going through a blood bath. One of the major factors leading to this fall in stock prices is inflation and the possibility of the economies going into recession. 

Under such economically dry conditions, are there any investment oasis to explore? Yes, recession-proof stocks can be your oasis. Let us learn about these stocks in detail.

Understanding Recession Proof Stocks 

A recession is a severe economic uncertainty that can impact the markets drastically. During a recession, a country’s economy experiences a slowdown leading to extreme market volatility. Technically, no business can be 100% untouched by the impact of the recession. While negative investor sentiments characterise this phase of the economic cycle, there are a few businesses that might offer you recession proof stocks. 

However, adding these stocks to your portfolio can help better if done before the economy goes into recession; if it does! But bro, trust me, we are not here to give you stock tips. The stocks we will discuss today are here to make you understand the concept. 

These businesses perform relatively well during the recession and are therefore called recession proof businesses. 
These businesses have historically performed differently than others during a recession and therefore, can be categorised as one. However, these stocks can belong to companies in different sectors. 

Let us understand these top recession proof stocks and why they are called so?

Top Recession Proof Stocks

Here are top recession-proof businesses you can consider investing in: 

Consumer essentials 

No one would stop brushing their teeth, washing their clothes, bathing etc., even if a recession hits the economy hard. 

These businesses are associated with producing necessary items like toothpaste, toothbrush, soap, shampoo, detergent, dishwashers etc. Therefore, their production, sales, revenue and profits can remain comparatively less volatile during a recession, making them recession proof stocks. 

Notable Indian brands in this category are stocks like Marico, ITC, and Hindustan Unilever (HUL). The stock price of ITC has recently increased by more than 24 per cent in the calendar year 2022. 

Products offered by these consumer essential stocks can remain in demand irrespective of recession. That is why they are also known as consumer staples or essentials. 

Discount retailers and grocery stocks

Have you ever been to a Dmart store and quickly entered the billing queue over a weekend? Such is the power of the discount retail and grocery businesses. 

Further during a recession, the population's income declines, making them prefer discounted products more than before. Even consumer staples or essentials have to be purchased from somewhere. These products are generally purchased through discount retailers and grocery stores. 

Therefore, the sales and revenue of these businesses are comparatively less impacted because of a recession. Furthermore, these are recession proof businesses that enable selling other recession-proof products.
Notable stocks in this category include Dmart (Avenue Supermarket), Spencer’s Retail Limited and more. These businesses generally run huge supermarket stores selling consumer stables and luxury items. 

Manufacturers of Alcoholic Beverages 

There is a very high-profit margin in making alcoholic beverages like wines, beers, rums, whiskey and other alcoholic products. 

The demand for these products is more or less unaffected by economic cycles of recession or boom. As the demand for these products can be stable during a recession, their revenues and profits might not be much impacted. Thus, if you are an investor in any such business, you can stay relaxed as these are recession proof stocks. 

Notable liquor manufacturing stocks in India are United Breweries, United Spirits, Som Distilleries, Assoc Alcohol, Globus Spirits and Radico Khaitan. 
However, the liquor market in India also faces severe competition from French spirit maker companies. Recently, French distillers have grown their sales in India by 25 per cent more than the previous year, making Indian liquor brands face margin pressure. 

Make-up and cosmetic products

What if there was a way to manage recession with beauty and style? Yes, you can do this by investing in stocks of make-up and cosmetic manufacturing companies. 
Yes, the sales of these products tend to rise during the recession due to the “Lipstick Effect Theory”. 

According to the Lipstick effect Theory, people prefer indulging in small indulgences that can help them stay calm during a recession. This is because any economic downturn is stressful. The main reason for this stress is businesses have lesser revenues, and the working population has less cash to spend. 

The earlier activities where these consumers would have spent on big-ticket indulgences are now out of the reach of their pockets. Therefore, their spending satisfaction can be temporarily diverted to smaller items like lipstick, cosmetics, clothing, apparel etc. With many people indulging in these purchases, demand can unpredictably rise during a recession. This makes these stocks recession proof. 

Among these stocks are Hindustan Unilever Limited (HUL), Marico, Emami Limited, Dabur, Procter & Gamble Hygiene and Health Care Limited (P&G), Gillette and more. 
Other than these, stocks in the grooming and skill development business can also fall into recession proof stocks. 

To conclude 

The above mentioned businesses are considered recession proof as per their historical stock trends during economic downturns. There are no hard facts or guarantees that the returns from these stocks can only be positive in a recession. 
Moreover, not all stocks in these categories might witness similar recession trends. For different stocks, trends might differ. 
Therefore, investor discretion is vital while finding value and investing in these stocks. For any information or research on stocks, use Ticker by Finology

Find your next multi-bagger and monitor your portfolio with #InvestingKaSearchEngine TICKER. That was all for today folks. Until next time Happy Investing!

 

*Disclaimer: The stock(s) discussed above aren't recommendations from Finology, they are only picked to make you understand the concept.

About the Author: Devashree Patel | 11 Post(s)

Devashree is a freelance financial content writer and a full-time Digital marketer with more than 2 years of experience. Currently, she's pursuing her MBA from NMIMS, and has gained several accomplishments in digital marketing knowledge.

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