Thursday, September 9, 2010

Companies Affected During Economic Downturn

According to the book "Your First $1,000,000" By Dr Michael Leong, there are various type of companies that are likely to be affected in the event of economic downturn:-
  • Highly leveraged companies
    • I quite agree with it as such companies have large amount of debts. During a downturn, there's a slight chance that if their business is not good enough, they might not have the funds to pay off even the installments to the banks. Even if they do have enough to pay the installments, if the bank decides that the value of their collateral (e.g. property and other assets) has a much lower value than the amount they have borrowed. The bank may call upon them to top up the difference in value between the value of the property and the amount they have loaned. Which may result in the company being adversely affected.
  • World-wide goods manufacturer
    • The author thinks that it's so as the demands may drop and affect their business while they may not be able to reduce their overheads in time. But I think that it depends on what is the goods that the company manufactures. If it's a necessity type of product, there's actually nothing much to worry about, as whichever the economic condition, we still will need the products. But if it's those luxury type of product then it will be more affected, especially if the target market is people from the middle class whom are usually most affected by economic downturn I think.
  • Oil-related companies
    • The author thinks that the demand will  be reduced and need for oil is likely to ease. But actually, even if the need reduces, a lot of time, a lot of business and people will still need oil to function, hence, I don't see that much a drop in terms of demand. On the other hand, I think such companies are more affected by the raise and drop in oil prices more than economic crisis, although their stock price will dropped a lot during the crisis but once it's over, the price will go up all over again, even to a new high, hence, it's not much of a worry in my opinion if the company's fundamental is strong and they know how to hedge against the oil price fluctuation. But I'm not sure how to gauge that yet so I'll just leave such companies out in my analysis.
  • REITs (Real Estate Investment Trust)
    • Although the property price and rental will drop but I felt that during the mist of economic downturn, especially during recession, it's when the price of such companies that's very attractive due to the type of dividend return they will be able to provide when the economic recovered. However, when buying such companies, we need to ensure that we have better cashflow and have excess cash on hand as they might take the chance to get rights issue and increase their capital. Most of the REITs does that the last economic downturn recently.
  • Retail-related companies
    • Their business will of course be affected as the demand will drop and times will be tough during the downturn, which I totally agreed with.

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