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How to profit from a slowdown?
Tue, 21 Aug Pre-Open

Before answering the above question let us first understand what slowdown exactly means. The classic definition goes like this "A slowdown is a situation in which the Gross Domestic Product (GDP) growth of a country slows down". Thus, slowdown is technically different from recession where GDP growth actually declines. Here is an example of slowdown. After clocking 8-9% growth over the last few years the Indian economy is expected to grow in the region of sub 6% this year. Thus, India is a witnessing a slowdown. It is not in a recession.

Now let us understand the impact of slowdown. First and foremost it could mean no/low pay hike for individuals. In a slowdown property prices decline, new launches get delayed, hiring freezes etc. You may also witness production declining as evident by the Index of Industrial Production (IIP). The construction activities also move at snail pace. Basically, in a slowdown sources of income dry out without any corresponding decline in expenses. In slowdown, your investments could also be impacted as equities underperform since corporate profitability comes under pressure. Discretionary consumption also declines as people start saving more for the future. This in turn further impacts sectors like travel and tourism. Thus, slowdown has a cascading effect on the economy.

So, how can you profit from a slowdown?

It offers a great opportunity to buy equities at a reasonable discount. Since the economy is surrounded by pessimism equities are available cheap. During such times if one is able to buy companies that have strong balance sheets and able management then he can profit in the long run. Thus, slowdown offers an excellent opportunity to build a portfolio for the long run. However, since no one can predict the bottom of a slowdown cycle one can stagger one's investment over a period. Systematic Investment Plans (SIPs) are good investment vehicles to do the same.

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