EconomyHow to prepare for a recession?

How to prepare for a recession?

(Expansion) – Since 1871 there have been 20 recessions in the United States and, if the current one ended up being one, there would be 21.

In Mexico, since 1980 there have been six recessions, while in the United States there have been five in the same period (the difference is due to the “December error”, which led to the 1995 recession here, but not there). Due to the close commercial relationship between both nations, our economic cycles have been in sync since the 1950s.

Business cycles are measured on gross domestic product (GDP), a concept proposed by Simon Kuznets in 1934. To measure the GDP of previous years, the researchers made ex-post calculations, “backward.”

Recessions are usually accompanied by a bear market in the stock market ( bear market, or a nominal fall of at least 20% in the index) that precedes them by 9-12 months. Analyzing that same period of 150 years, there have been 26 bears , because on six occasions there was a bear market without there being an economic recession. Historically, before a recession ends, a new bull market begins.

The most accurate recommendations to face a recession come from the wisdom of economics and finance theorists, from half a century of trial and error, and are the following:

1. Do not rush into decisions charged with the emotion of the moment, such as fear or discouragement, attacking valuable assets and selling them at serious discounts or, also, taking very onerous loans for working capital, leaving key properties as collateral at large volumes .

2. Maintain a liquid bag with at least -what would be required in- a year of short-term expenses (suppliers, administrative expenses, services, etc.) to fall back on at any time. This liquidity can be divided into at least two reliable institutions, producing a null or very low return, to be converted into cash with absolute alacrity.

3. Develop a “war chest” to address opportunities that will arise in a period of significant downturn in activity for any business, such as very attractive valuations of competitors, suppliers, customers or sideline companies that can complement the own portfolio vertically or horizontally.

To be able to compete for acquisitions like these, the aforementioned chest should be an account that produces interesting returns but is also payable in short terms, and should typically represent 40% of a year’s sales. The rest of the transaction can be completed with stock swaps or by leveraging the balance of the business to be purchased at good rates.

4. The most important point , perhaps, is related to talent. During a correction of the economic cycle, and in the face of waves of uncertainty, the worst idea immediately arises: cut staff. This is usually the most serious mistake and should be avoided at all costs, because the success of the business depends on its people.

Replacement costs and the delay in re-forming a cohesive team are very high and flexible work schemes such as reduced hours, payments in creative ways such as share options or transfers to sister companies should be sought instead.

In conclusion, calm, good sense and, why not, faith must reign. The base scenario should be that of a recession in the coming quarters, but at the end, a new cycle full of promises and new horizons of opportunity and growth will come.

Editor’s note: Jorge A. Martínez, director of the Financial Think Tank of EGADE Business School of the Tecnológico de Monterrey. Follow him on . The opinions published in this column correspond exclusively to the author.

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