A recession is defined as a period of economic decline, characterised by high unemployment and low economic growth. The Centre for Economics and Business Research (CEBR) has forcasted that the world will experience a recession in 2023. The International Monetary Fund (IMF) has forecasted that hat more than a third of the global economy will contract and that there is a 25% chance that global GDP will grow by less than 2% in 2023, which it defines as a global recession.
A separate Bloomberg survey of 42 economists predicts the probability of a recession over the next 12 months now stands at 60%. The Wells Fargo Investment Institute expects the U.S. to see a full recession, recovery and rebound by year’s end. The Barclays Capital says that 2023 will be the worst global economy in four decades. While it is impossible to predict with certainty when a recession will occur, it is important for investors to be prepared for potential economic downturns.
The looming recession of 2023 is caused by the rising interest rates. When inflation picks up and the Fed, the US Central Bank, responds by pushing up interest rates to suck liquidity from money markets. Since the borrowing costs rise, businesses they generally make fewer purchases, fewer investments, lay off people etc to save costs. The Fed has already hiked interest rates from near 0% to the 4.25%. As a consequence, home sales in Nov 2022 was down over 35%.
However, this looming recession of 2023 will be different as white collar jobs will be more severe than blue collar jobs. The FANG Company (Big Tech giants of Silicon Valleys) have already announced major job cuts. In short, this looming recession will severely chock the middle class first.
This begs the question that for 2023 how do we invest so as to save our wealth and generate returns that annual inflation.
Primarily all major investment houses focus on buying stocks of companies that have a history of performing well during economic downturns.These companies are typically those that are considered to be “defensive” in nature, such as consumer staples, healthcare, and utilities. These industries tend to be less affected by economic downturns as people still need to buy food, healthcare, and pay their utility bills. Even the so called category of “sin stocks,” such as alcohol, tobacco are considered recession proof.
Further, in recession the smart money tends to tends to shift to investing in bonds. Bonds are a form of debt that are issued by companies and governments. During a recession, bond prices tend to rise as investors flock to safer investments. This is because bonds are considered to be less risky than stocks, and offer a fixed rate of return.
Additionally, the smart money also moves to assets such as gold and real estate. These assets tend to hold their value during recessions and can act as a hedge against inflation.
However, if we have a long term view recession provides an excellent opportunity to build a portfolio. As Warren Buffest says “be greedy when there is fear”. While it can be tempting to sell off investments in a panic, it is important to remember that recessions are typically temporary and that the economy will eventually recover.
In conclusion, a looming recession in 2023 is not something to be ignored and it is important for investors to take steps to protect their portfolios.
(The writer, Nishant Chandra, is the founder of Blocktickets)
