In a collision of crises, the United States, China and Europe’s economies could soon be on the brink of a global recession, as per the International Monetary Fund (IMF). A resurgent pandemic, inflation, and war in Ukraine have adversely affected global economies in recent months. There is a strong probability that the world economy will suffer a decade of intense stagflation if the thicket of threats continues to intensify. A U.S. recession is more than 50% likely within the next 18 months, according to TD Securities. A number of reliable economic indicators already indicate that the U.S. economy is likely to roll over in the near future.
The year 2022 hasn’t been easy for investors. Markets are struggling; bonds are having their worst year in history; cryptocurrencies like Bitcoin have tanked; and even the once vibrant housing market is beginning to falter. Asset prices are declining everywhere. In other words, it’s been a challenging year for those looking to park some extra money where it will actually generate a return. Even if your personal finances are fine, protecting your invested capital would be a good idea if the economy declines. Although there are no recession-proof investments, some securities and strategies can weather the storm better than others.
Markets can be volatile and uncertain during a global crisis or economic recession. Despite the uncertainty created by wild swings, opportunities can also be found in turmoil. Should you avoid the risks by staying away from that tension or are you better off jumping in and reaping the rewards? It may not be obvious or easy to figure out the answer. Historical patterns may not be able to provide a clear direction, or even very many clues, about what may happen in the future.
Global Economic Slowdown
It is not uncommon for income and employment to decline after years of growth and success. The downturn could be caused by an external event, such as an invasion, a supply shock, a drop in consumer spending due to inflation, or a sudden correction in overheated asset prices. The stock market typically plummets during a recession. Share prices can experience wild swings on the markets. Any hint of news-whether good or bad-can cause investors to flee to safety, and the flight to safety can cause some investors to withdraw their money from the market.
The wages companies pay workers and the prices they charge consumers are not elastic, so companies often cut their payrolls to maintain profitability. The rise in unemployment leads to further declines in consumer spending, resulting in a vicious cycle of economic contraction. In general, a recession is defined as a decrease in real GDP for two or more consecutive quarters. However, the National Bureau of Economic Research (NBER) defines a recession as a period of “significant decline in economic activity that is spread across the economy and lasts more than a few months” and uses a variety of factors to determine whether or not a recession has occurred.
Impact of Recession on Consumer Investments
It’s natural for investors to worry about stock prices falling during a recession and how their portfolios will be affected. Additionally, you may hear reports of declining housing starts, rising unemployment claims, and shrinking economic output. In what way do house building and shrinking output affect investor portfolio? Apart from normal investments, how does a recession affect consumer investments?
It is the decline in trust in financial institutions that led to the emergence of entirely speculative digital asset classes like cryptocurrencies and non-fungible tokens. As market uncertainty and investor bearishness continue to grow amid renewed volatility, U.S. consumer sentiment surveys have dropped to levels unseen for more than a decade. Inflation is the primary culprit, having reached its highest levels in four decades. The negative outlook is somewhat understandable; inflation has historically been destabilizing to markets and society, and the emergence of COVID-19 poses significant risks. As a means of combating inflation, the Fed has increased interest rates at its fastest pace in decades and appears less likely to stabilize market stress than in the past. Even the most optimistic observers can feel on edge as a steady drumbeat of negative headlines comes in from all over the world.
Currently, mood measures among U.S. consumers and investors are at their lowest levels since the global financial crisis (GFC) of 2008-09. Since its inception in 1978, the University of Michigan Consumer Sentiment Index, which aggregates consumer views on finances, outlook, and business conditions, has fallen below 60 only four times. The other episodes are related to the Iran hostage crisis and late-stage stagflation of 1979-80, the global financial crisis in 2008, and the S&P downgrade of the U.S. Treasury in 2011. Declining consumer sentiment is highly correlated with rising gas prices, among other factors
The inflationary process is fundamentally destabilizing, one that most consumers around the world have not experienced. Investors and consumers are demoralized by other sentiment-sapping factors, such as an uncertain COVID-19 recovery, geopolitical conflict, low confidence in political leaders and institutions, and in the U.S., Fed hikes widely touted as a headwind. Thus, the future seems unusually murky, and no crystal ball can predict what shape the economy will take in the coming years. Is inflation likely to continue for a long time? Can Fed hikes cause a “soft landing” or a recessionary jolt in the U.S. economy? The questions are numerous, and the answers are elusive. It is common for markets to price in the worst-case scenario during periods of uncertainty and negative sentiment.
Current Scenario: Recession Looms Globally
During the month of August, the Federal Reserve accelerated its unwinding of its balance sheet, causing some investors to worry that the so-called quantitative tightening will weigh on the economy and make this year even harder on stocks and bonds. In June, the Fed began unloading some of the Treasuries and mortgage-backed securities it holds at a rate of $47.5 billion, roughly doubling its balance sheet to $9 trillion after the pandemic. Quantitative tightening has been stepped up to $95 billion this month by the Fed. Fed’s unwinding is unprecedented, and its effect on asset prices has so far been hard to pinpoint after the central bank stopped purchasing Treasuries in an insensitive manner. A growing number of investors, however, are cutting back on equities or fixed income investments as quantitative tightening accelerates, concerned that the process could further weigh down asset prices and hurt the economy. The coming recession could outlast any one in the United States, due to war, energy rationing, and a winter of energy deprivation.
Europe’s Crippling Gas Issue
Recently, in the week through Sept. 7, money managers pulled $3.4 billion from European stock funds, bringing the total outflow to $83 billion, according to Deutsche Bank AG. BlackRock and Amundi SA are among those fleeing. Bank of America Corp. and JPMorgan Chase & Co lowered their year-end Stoxx 600 and Euro Stoxx 50 forecasts, respectively.
In recent months, Europe has faced the threat of a recession as its central bank embarked on an aggressive campaign to tame inflation. An energy crisis that could result in rationing this winter is being exacerbated by Russia’s weaponization of gas supplies to the West. The proposed price caps are already forcing strapped governments, some of which have debt ratios of around 150 percent, to dig deeper into their coffers for hundreds of billions. During this time, the dollar has plunged to levels not seen for two decades against the common currency. As a result of a weak currency that makes exports more competitive and a resilient second-quarter earnings season, Europe’s main stock index is down just 14 percent in 2022, outperforming the US benchmark and the MSCI World Index.
Despite this, warnings are growing louder that a complete shutdown of Russian gas would plunge the region into recession, describing it as a “Lehman Brothers” moment for the energy sector. 11 economists surveyed in August predicted a recession in the euro zone over the next year, with odds reaching 60 percent. Western European economies are heading into the Middle Ages as natural gas prices are over $100 per megawatt hour higher than they were a year ago. Russian military sanctions against Ukraine are being retaliated against by cutting off natural gas sent to Europe and cutting down forests for firewood. With companies suffering high electricity bills (Arcelor Mittal is closing two steel mills in Germany), Germany is finally considering decoupling from China. There is a sense of nervousness among them due to the energy crisis. Now that manufacturers’ energy bills are at an all-time high, they want to make it harder for them to outsource. Since energy prices are rising, the European Central Bank has been tightening more decisively, and demand has been weaker, a deeper recession and higher inflation are now expected.
According to Barclays, the eurozone is predicted to enter a recession in the fourth quarter of 2023, which will last until the second quarter of 2023. There will be some countries that will be worse off than others. Due to its high reliance on Russian gas and bottlenecks in transporting gas within Europe, Germany will suffer the most. The majority of piped gas comes from Russia. With about 50% of its power generated from natural gas, Italy ranks second in poor performance. On Friday, economists at Barclays wrote that Germany and Italy are more likely to face physical shortages, while France and Spain are more likely to experience price shocks as a result of the energy crisis. The fourth quarter is expected to see the highest level of inflation in Europe at 9.3%. As demand slows and real incomes fall, Barclays says the domestic drivers of medium-term inflation now appear weaker than in June.
What Do Investors Think?
As a result of recessionary measures, it is unsurprising to see that 56% of investors describe themselves as risk-averse when it comes to portfolio management, as per data from the Financial Times. As inflation bites into consumers’ spending power, many are keeping with tradition – avoiding speculative risk assets and investments with low liquidity in favor of safe havens like gold. Compared to Q1 figures, 33 percent of investors plan to decrease their investments in cryptocurrencies. As a result of crypto’s tendency to crash and experience extreme volatility, this is hardly surprising. It suggests, however, that bitcoin might not be the inflationary hedge or ‘new gold’ some once believed.
Another asset class that investors are shunning is classic cars, with 44% looking to decrease their holdings from Q1’s figures. Apparently, they want to liquidate their investments to help cover daily expenses. Additionally, 35 percent of investors plan to reduce their investment in private equity firms, compared to 11 percent in Q1.
Stocks and shares remain a popular investment asset among investors, despite the current financial climate’s impact on consumer spending. The number of investors with stocks and shares investments has actually grown by 5 per cent since Q1 as 19% plan to invest in the next 12 months. Consequently, investors may be preparing to buy the dip that a recession may create, in order to profit from a market recovery later.
Likewise, safe haven assets remain attractive. During recessions, investors frequently turn to these investments, including real estate and precious metals, for their low volatility and consistent returns. In view of the fact that these assets tend to maintain or increase in value, 14 percent intend to increase their property investments within the next 12 months, and another 12 percent plan to pivot towards gold and other precious metals.
As far as the U.S. is concerned, given the severity of current inflationary pressures and the need for the Fed and other central banks to regain price stability, investors should not expect any easing in monetary policy in the near future.
Asia-Pacific Trends
According to a new survey by Swiss private bank Lombard Odier, ultra-rich investors in Asia-Pacific are moving away from a “wait and see” approach as concerns over market volatility set in. As a result of the study, the top concerns of the region’s wealthy investors – defined as those with a minimum of $1 million of investable assets domiciled in Asia-Pacific – were revealed. According to the 2022 HNW Individuals (HNWIs) Study, these tips included managing current market volatility and geopolitical risks and diversifying their portfolio to avoid them.
The current market conditions have forced about 68% of investors in Singapore, Hong Kong, Japan, Thailand, the Philippines, Indonesia, Taiwan, and Australia to realign or change their portfolios. Generally, wealthy investors in the region are less concerned about possible rising interest rates, mainly because they think governments will not raise rates to a level that may harm economic growth. Investors from Australia and Indonesia, however, are less certain. Around 70% of those surveyed in those countries say higher interest rates are a concern.
The Philippines’ investors are most concerned with geopolitical instability. Hong Kong and Singapore’s investors also cited geopolitical tensions as one of the top risks. Investors are concerned about the impact of geopolitical risks and conflicts on their investments, with many expecting lower returns in the future. This time of volatility may also lead them to miss out on opportunities. Due to falling stock prices, widening credit spreads, and high long-term rates, many Hong Kong and Japanese investors are questioning the effectiveness of their diversification strategies.
The survey found that ultra-rich investors in APAC are becoming more conservative, and are investing more in their own businesses rather than traditional asset classes. Many people have also invested in safe assets like gold and cash. Investors in Singapore and Australia are leading the way in investing in private assets, including private equity, private debt, real estate and infrastructure. In addition, many investors have fled their domestic markets in the past two years. According to the report, Japanese and Indonesian investors are actively diversifying their portfolios to cope with the post-Covid uncertainty. According to Lombard Odier’s Aboulker, “even if Covid-19 has a global impact, equity returns in different countries differ significantly, and certain asset classes are underrepresented in some markets.” These investors understand the importance of a long-term approach to investing and looking beyond their domestic markets, while reducing their dependence on domestic factors.
Choppy Waters Ahead
News of an impending recession will weigh heavily on investors’ minds, even though it is difficult to predict exactly how they will fare in the next few months. Even though there are still opportunities to be had in the current economic climate, reducing risk will be crucial for many in the months ahead. Investors must develop strategies that meet their individual needs. Until then, the recession that looms ahead that has already severely impacted consumer investments will continue on till the next year.
