How to recession-proof your portfolio

*This content is brought to you by Brenthurst Wealth

Renee Eagar*

How you react to the expected 2023 recession could depend largely on what you did during the last global recession. Do you remember 2007/2009? The US entered a recession at the end of 2007, markets collapsed some nine months later after US banks over-extended themselves, and the global economy only recovered around mid-2009.

These were tough, scary times if you’d been invested in international markets. But just at the time that Europe and the US entered recession, China sparked a commodities boom that helped South Africa ride out the worst of this storm.

Can we expect a similar reprieve in 2023? That seems unlikely because of China’s Covid struggles that have kept demand muted from a key trading partner. But that might change in the next 12 months, we will have to wait and see.

The World Bank certainly doesn’t have high hopes for the global economy, forecasting growth in 2023 of only 1.7%, with the US forecast to grow just 0.5%. In fact, fears that the US economy will slip into a recession have risen steadily, with one poll of economists showing a 64% chance of this happening. A similar number of economists (62%) say the Fed probably won’t cut rates until 2024. The outlook for SA is similar and although some commentators do not expect a recession, storm clouds are gathering.

In the face of such distressing news, it is easy to make mistakes. The trick is to not overreact and if you have remained focused and invested this past year, now is not the time to overreact and distract from your long-term goals and trust in the experts to manage your portfolio.

Hold steady

Investors the world over have already suffered through two very tough years sparked by the pandemic. And all indications are we should brace for tough times to continue for the foreseeable future.

Inflation is slowly creeping lower, but interest rates are expected to say elevated for a while still. So, global growth and stock market returns will continue to be subdued in the short term.

Difficult as it may seem to do, holding steady and ignoring the noise should be your key focus points. Only a steady approach will deliver the long-term growth that you need.

Selling out at extreme lows will take years off your portfolio objectives, and in a high inflationary world although cash returns look attractive, they are not going to give you inflation beating returns over the long term.

Source: Morningstar

Spread your risk as far as you can

Diversifying your portfolio will help to reduce your exposure to the risk of holding too many local or too many global stocks. And remember, the balance of your portfolio should also reflect your risk profile.

If you’re under 40 then you should definitely have a higher exposure to equities than someone nearing 65. But this is a discussion you should have with a trusted advisor who can help you stick to your long-term plan.

Working with an advisor removes the risk of falling for disreputable fund managers who charge high fees and aren’t able to generate the returns you need. Any financial advisor worth their salt should be able to offer you a selection of funds and fund managers that each have their strengths and weaknesses, but that collectively can help secure your financial future.

Working with respected fund managers also means you’ll be able to get exposure to quality companies, both locally and offshore. The world’s biggest and best-run companies know how to create value and grow, even in tough times. And these are the ones that should offer some protection against a global slowdown.

One last reason you want to hold a combination of value and growth stocks is so that you don’t miss the eventual recovery.

And if you’re still risk averse, but committed to the long term, then an asset class that has done particularly well over the last while is SA government bonds. These have been offering steady yields, and are always worth considering to use when conditions are right and to provide your portfolio with stability.

So, if you did happen to live through the 2008 global financial crisis, then hopefully you’ll know that things do improve, and markets will turn around. If you weren’t fortunate enough to gain this experience, then I’d suggest using 2023 to practice your patience and commitment to your long-term financial goals.

The Global markets could remain volatile for some time still but already Jan 2023 there has been a good improvement across the board and most markets are well into the green, long may it last!

Source: Datastream 27.01.2023 Fidelity International

If you are a new investor and have a long-term view, now might be a good time to enter markets at a discount.

It won’t be easy, but it will be very rewarding.

  • Renee Eagar, Certified Financial Planner®, is head of Brenthurst Wealth Claremont, Cape Town [email protected]

Read also:

Visited 2,234 times, 1 visit(s) today