Recession can be anything from a drop in a country’s economic growth to a global economic slump. Most times, a recession happens when there is a negative break to the balance between demand and supply in a country.
When the economy heads toward a recession, it is normal for investors to worry about falling stock prices and the impact on their portfolios. The markets can be volatile with prices experiencing excessive hikes. Investors react quickly to this and to be on a safer side, they pull their money out of the market entirely.
However, asides the adverse effects of the recession on the economy, here are four major ways of how a recession can affect investors:
1. The higher cost of production: Costs of transportation, marketing, distribution and insurance are few among the many ways for production costs to increase. When the cost of production becomes unbearably too high and the economy becomes too unfavourable for business, investors are left with no alternative than to cut their losses and leave. In business, risk-taking is necessary but an unfavourable economy and a very high cost of production can become too risky even for investors.
2. Fall in profit: When a recession hits hard, there is an unsolicited rise in the cost of production. The cost of production directly affects the cost of goods however, there is not enough money in the hands of the consumers to match the cost of goods. When the margin is unbalanced, consumers buy fewer goods and the demand drops. If the demand drops, profit falls too and businesses begin to fail. This failure of businesses is enough to scare any investor away from a country with a recession.
3. Higher taxes: Asides the devil, the other thing people collectively hate is taxes. Just like the average individual, investors also hate the idea of excess taxes. However, in a situation of an economic slump, the government can try to level out the budget deficit by introducing additional taxes. Direct and indirect taxes including VAT could be enforced on businesses by the government. If a bad economy does not daunt a potential investor, additional taxes could.
4. Unfriendly government policies: Sometimes, a recession could make the government introduce some policies that may seem unpleasant to investors. These policies introduced could allow massive interference of the government in private business and could serve as a deterrent for potential investors who plan on investing in the future.
