The Survivors and Winners of a Recession: A Look at Recession Proof Industries

China’s economic growth is at its weakest since the 1990s. Singapore’s factory output slid by 8% in August, reawakening fears of a technical recession. Germany forecasts a dip of 0.2% in the third quarter GDP after a 0.1% dip in the previous quarter. In Britain, rumors of an impending recession – should a no-Brexit deal result – are stirring. In the South, Australia predicts a second quarter GDP growth of 1.2 % –  the slowest in nearly two decades. Worldwide, the economy is slowing. Are we due for a recession? Perhaps more importantly – what are the impacts of a possible recession on different sectors?   

While there are winners and losers in every business cycle, healthcare, food and beverage, and discount retail sectors have outperformed the aggregate economy to an impressive degree. 

The healthcare sector has historically been immune to recessions, not only maintaining current sales but achieving growth. Regardless of the economic state, there will always be demand for medical products and services. At the peak of the Great Recession (December 2007 – June 2009), the U.S Bureau of Labor Statistics reported an overall unemployment rate of 10%. In contrast, employment rate in the healthcare sector rose by 6.6%. The stock market also reacted similarly. In August 2008, Johnson & Johnson’s stock price hit an all-time high of $71.55 before falling to $47.97 in March 2009 and quickly rebounding afterwards. Compared with the 53% crash of the Dow Jones during the recession, Johnson & Johnson beat the market by 20% and has consistently outperformed in every recession. 

The food and beverage industry also proves resilient during recessions. The income inelastic nature of the products means that there is little worry of a surplus. Moreover, affordable food and beverages provide the perfect means of indulgence as the general disposable income declines. Alcohol consumption in particular increases during recessions as people use alcohol to “self-medicate”. Take Diageo, the world’s second largest producer of sprits and beers including Smirnoff and Baileys. Between 2007 and 2009, sales jumped by 24.5% and the company maintained its profit margin at 18%.  Another outperformer, Coca-Cola's stock price reached a high of $31.89 in December 2007 before slipping to $19.55 in March 2009. Compared with the Dow Jones, Coca-Cola scored an outperformance of 19%.  

At this point, a key observation must be made. All three companies outperformed the market not only because of the industries they operate in, but also because of their scale, diversified product portfolio, and financial flexibility. Although the industry plays an important role in business performance during a recession, this alone cannot explain which companies survive economic downturns, and which companies suffer. 

Discount retailers have held strong during past recessions. In fact, they have benefited – and for a simple reason: recessions incentivize consumers to seek out the best bargains, from large independent stores to smaller chain stores. The resulting negative correlation between demand for discount store products and income benefits discount retailers. A prime example is Walmart, whose quarterly sales climbed on average 2.5% during the Great Recession. Looking at investor sentiment during the period, Walmart peaked at $51.56 in January 2008 and fell to $46.53 in February 2009, beating the Dow Jones by a hefty 43%. The company has outperformed the S&P 500 in every single recession since 1973.  

Healthcare, food and beverage, and discount retail businesses have historically performed well during recessions and will likely to continue to do so. The consumption of these products is either unaffected by or are encouraged during recessions. While past observations provide guidance on future expectations, it certainly does not tell the full story. Although all recessions follow two consecutive quarters of falling GDP, the cause of each is different. In 1973, it was the quadrupling of oil prices as a result of the OPEC oil embargo. In 1980, it was the 13.5% inflation and subsequent quantitative tightening that put energy supply at risk. In 1990, it was the Iraq invasion of Kuwait that significantly reduced oil supply. In 2001, it was the collapse of the dot-com bubble, the 9/11 attack, and multiple accounting scandals. In 2008, it was the subprime mortgage crisis. Much has changed since then, and the next recession will be primarily driven by a combination of the US and China trade war, diplomatic breakdown within Brexit, and overall global economic slowdown. It would therefore be an oversimplification to say that this time it will be no different. Notably, we can predict that the increasingly aging population will demand a greater role of the healthcare industry in the upcoming recession.  

The German economy is still shrinking and India’s Secretary General Sitaram Yechury has just announced a recession. The world experiences the longest business cycle yet. While worries of a recession flood the market, news of economic recovery provides temporary relief. Surely, a recession is coming – but when will it strike?