In today’s Exponential Investor

  • Double or nothing
  • Stopping or bingeing?
  • Two stocks with which to drown your sorrows

A couple of days before Christmas 2018, my co-editor, Shae Russell, posted the following on Twitter:

Source: @shaerussell on Twitter

I replied that I thought Australia wouldn’t fall into a “technical recession”, which is two consecutive quarters of negative growth. My view was negative growth in one quarter, the slimmest of growth the next quarter, then another quarter of negative growth.

I predicted this would come in Q2 and then Q4 of 2019 – escaping recession, but, in reality, still very much a recession.

Shae was expecting back-to-back negative quarters in Q3 or Q4 2019.

We had laid the foundations for a good old-fashioned wager, to be paid in the hardest of currencies on earth – a case of beer.

As it panned out, I was wrong, though not by much.

Q2 growth was 0.6% (I was pretty close). Q3 came in at 0.6% growth. And Q4 was just 0.5% growth (note that the growth rate did shrink from Q3 to Q4).

Anyway, I was out.

Well, according to the government’s statistics we were both out, but the real impact in the actual economy did suggest the country was in the midst of a recession. In Q4 of 2019, real net national disposable income shrunk by 0.9%, the terms of trade (price of exports relative to imports) were down a whopping 5.3%, and current price measures GDP did show negative growth of 0.3%.

So, if you want to call a winner, Shae was closest. Though of course I will dispute that until the cows come home. Anyway, I owe her a case of beer.

However, in Monday’s Exponential Investor, I said the following:

In fact, I’m of the view that the UK will likely dip into a recession in the fourth quarter this year, the first quarter of next year, and possibly all of 2023.

I see a recession coming, and for investors, if that’s the case, you need to start thinking now about what moves to make.

What I like about Shae is that she’s never one to miss an opportunity.

After seeing my editorial on Monday (which you can read here if you missed it), she thought it best to up the stakes. A double-or-nothing opportunity on recession betting.

I do need to clarify what her prediction is, and we will probably discuss this in Friday’s Exponential Investor Podcast. But the challenge has been accepted.

On the line now, two cases of beer.

While this may seem a little flippant. There’s some method to the madness today.

More or less drink in a recession?

There have been numerous studies on the dynamics of the alcohol industry during periods of recession.

The anecdotal evidence suggests that alcohol consumption rises in a recession as a crutch to escape the pressures of a struggling economy.

However, the specifics are far more nuanced.

Some studies suggest that the number of drinkers actually decreases during a recession, as reflected during the 2008 and 2009 slump.

Yet while the number of drinkers may fall, binge drinking actually rose, somewhat balancing out the decline in numbers.

Another study suggests that in 2008/09, across the board, beer, cider, wine and spirits sales all declined, though beer and cider were hit far harder than a “flattened” wine and spirits market.

But then further research shows that US alcohol sales expanded by 9% in 2008, plummeted in 2009 (but still grew by 1%), then soared by 10% in 2010.

It’s a confusing market to assess. But one thing does seem consistent amongst the studies: in periods of recession, there does tend to be a shift to drinking more at home than on-premises.

This also fits with anecdotal evidence that people look to tighten their belts in recessionary periods, and discretionary spending such as evenings out are typically one of the first and easiest things to eliminate. They don’t stop drinking so much as just stop going out to do it.

Drinking-buddy stocks

This makes a case of beer or two pretty good currency in a recession. That’s how forward-thinking we are here at Exponential Investor. We’realready looking at the new currency of a recession to enact trade: at-home boozing.

In all seriousness, though, it does make you look at certain companies with a little more consideration if we are heading into a recession.

And beverage and alcohol companies catch the eye in particular.

Diageo Plc (LSE:DGE) and Pernod Ricard (PAR:RI) are two of the largest and most established alcohol companies in the world.

You might be familiar with some of the brands under Diageo, such as Captain Morgan, Guinness, Smirnoff, Johnnie Walker, Haig Club, Tanqueray and Gordon’s.

Ditto for Pernod Ricard, with Chivas Regal, Glenlivet, Jameson, Absolut, Beefeater, Malfy, Malibu, G.H. Mumm, Campo Viejo and Jacob’s Creek.

I can categorically say that, in 2022 alone, I’ve have contributed my fair share to the bottom line of both companies.

As I wrote on Monday,

If… recession is imminent, how do you invest? Do you flee to cash? To “hard” assets? Do you ensure you’ve got some money to move into the market as this happens? Or do you position your portfolio now into “recession-friendly” stocks that can weather such a storm, or, in some cases, even perform during a recession?

Well, I’ve never liked being “out” of the market. I think you can still hold some great long-term positions in high-growth, high-risk stocks that cover key aspects of our future – tech stocks, for example, such as in quantum computing, artificial intelligence, blockchain and distributed ledger technology, autonomous systems and new energy.

But those are multi-decade long positions I’d be taking. For areas that have the potential to weather recession conditions and continue to provide some long-term growth potential, I would be looking a lot harder at alcoholic beverage stocks.

Until next time…

Sam Volkering
Editor, Exponential Investor

PS Under recessionary conditions, there are other high-risk markets with potentially stratospheric growth prospects, of course… my colleague, renewables expert James Allen, counts the green energy markets amongst those. The tragic situation in Ukraine could be a catalyst for a green energy boom, and James is going to be putting the renewables markets under the microscope in an urgent broadcast going out later this afternoon.