Red lights are flashing all over the economic dashboard suggesting that we are heading into a recession. So we are facing a period when the economy gets smaller instead of growing. But lately I have been thinking about buying growth shares for my portfolio, such as Alphabet and Amazon.
Does that make sense? I think it may do – here are three reasons why.
1. Long-term investing not short-term trading
I focus on the long-term prospects of a company when I think about buying shares. For example, right now JD Wetherspoon and boohoo are struggling with challenges such as high inflation. But I continue to hold those shares because I think their business models have attractive long-term prospects despite today’s difficulties.
Growth shares are attractive to me because of their long-term prospects. So I do not think it makes sense for me to worry too much about whether their sales and profitability could struggle in the next year or two. By adopting a long-time investing horizon, I can focus on ultimate business strength, not short-term economic factors.
2. Growth matters more in a recession
When does growth come into its own as a business strategy? I think there is a lot to be said for the value of growth at a company when the wider economy is in recession.
One of the problems a recession can cause for a business is damaging it for the long term. Often a recession forces companies to cut costs, which they might do by closing branches or sacking experienced staff. But trying to reverse such moves when the economy recovers can be hard, or even impossible. Building a new factory from scratch is costly and time-consuming. It typically costs far more than the carrying cost of a long-established site on a company’s balance sheet. Meanwhile, sacked employees could go elsewhere. So even if a business recovers, it may have lost experienced, productive workers forever.
If a company remains in growth mode, it may not have to make the same tough cost cuts in a recession that loom for struggling businesses. That could give it significant long-term advantages. So while a recession will be bad for many businesses, it could actually help some growing companies strengthen their positions in the market.
3. Growth shares on sale
Leading up to a recession and when it begins, many investors try to stock up on so-called defensive shares. Those could be utilities such as National Grid or supermarkets like J Sainsbury – basically, businesses where investors reckon customer demand should not be heavily affected by a recession.
But that can mean the valuation of growth shares becomes more attractive. Whether or not the short-term business outlook for such companies has changed, investor sentiment towards them has done. That can push prices down. I think it helps explain why growth shares like Microsoft, Apple and Alphabet have all lost over 20% of their value this year, even though each of them is higher than it was a year ago.
Not all growth shares would be good value even if their prices fell, however. I see now as a good time to search for bargain growth shares to add to my portfolio. I do not think that is crazy and am hoping it turns out to be rewarding!