Would you agree...

that the following statement is slightly vague:

”when the economy is weak and may be going into a recession, it is usually a good time to invest in distressed securities”

On one hand, it creates opportunities for investors who could go long debt, short equity or long-only, BUT…a recession is bad. Widening credit spreads, more bankruptcies etc. Would you agree or disagree with this statement?

Disagree with the statement provided. Agree with your rationale - widening credit spreads, more bankruptcies would reduce performance in distressed securities

It’s a weird one and a strange rationale.

The argument is purely based on price of acquisition.

In a recession there are many distressed companies. Therefore with plenty of supply the price of acquisitions falls. As a strategic buyer you have more scope to negotiate a good deal (as all the companies are competing to get a buyer). Consequently you get better prices.

Therefore yes, buying distressed securities in a recession or heading into a recession is a factually correct comment.

But distressed securities offer diversification because I think according to the curriculum isn’t it NOT related to market additivity?

opportunities to invest in distressed increase during hard economic times. distressed securities are more so event driven than market driven returns. I’m not sure that I would agree that distressed are better than bonds, etc. during hard times but the opportunities certainly increase during bad times.

Sheeesh you guys make good points. I just looked through the curriculum and it doesn’t mention anything regarding performance in different economic cycles. One thing to remember after having looked at it is that they exhibit negative skewness and high kurtosis

”when the economy is weak and may be going into a recession, it is usually a good time to invest in stocks

Take the contrarian approach. Buy low sell high.

I think you can relate it to output gap if output gap is just about to start or you are just starting to get into recession with widening output gap then I would say equities are bad idea, if it is late in recession and output gap is about to converge or decrease then equities are good to buy as probably still low and about to rebound, you can apply this to the distressed securities as well, wouldn’t invest if beginning of mkt downtown but middle or tail end probably would.!