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Are you prepared for a recession?
Amid growing risks of a recession in the global economy, here’s an expert’s advice on how to stay resilient amid economic turbulence
Investors should keep in mind that the economy moves in cycles, and should remain invested to capitalise on the next upcycle.
PHOTO: GETTY IMAGES
Are major global economies headed for a recession this year? Likely, according to forecasts and experts. But there are rays of hope amid a generally gloomy outlook.
In his May Day message on April 30, Prime Minister Lee Hsien Loong said that while Singapore expects slower growth, it should avoid an outright contraction.
What should you do to protect and grow your finances amid economic uncertainty?
Mr Francis Tan, investment strategist at UOB Private Bank’s Chief Investment Office, answers some of your key concerns. For the past five years, he has been making asset allocation decisions for clients’ portfolios.
Mr Tan, who is in his 40s, was previously an economist with UOB. He has also held economic and investment research roles with the Singapore Government and other global banks.
Q: I’m concerned about job security and the state of my finances should we be hit by a recession. What should I do?
A: Planning for contingencies such as a recession is a prudent move, which aligns with our Risk-First Approach to managing one’s finances.
You should first protect yourself and your loved ones against potential risks by having an adequate emergency cash buffer and sufficient insurance coverage.
In general, you are recommended to have liquid savings of at least six months’ worth of expenses. In these uncertain times, it might be wise to have a larger buffer.
Rate hikes by central banks over the past year now allow you to grow your savings with higher interest rates while still keeping your funds liquid with deposit accounts.
As your finances and the external environment evolve, so should your financial plan. I would recommend speaking to a financial adviser and reviewing your savings, insurance plans and investments if you have not done so lately.
Q: My income is unlikely to grow should we enter a recession. Between volatile investment returns and increases in the cost of living, I’m running out of options to grow my savings. Is there anything else I can do to build my wealth amid such uncertainty?
A: Inflation remains stubbornly high, so it is not the time to stop investing or your savings will get eroded by the rising cost of living.
Investors can consider locking in the current high yields offered by investment grade bonds – a defensive asset class that tends to be resilient during economic downturns.
Additionally, markets are expecting central banks to pause interest rate hikes and even cut rates later this year, so bonds also have the potential for capital appreciation.
Those with the appropriate risk appetite can look at stocks in defensive sectors such as healthcare. Growth stocks that tend to be highly sensitive to interest rate movements, such as those in the tech sector, also stand to benefit from central banks ending their rate hike cycle.
Q: I am concerned about the performance of my investments if the global economy slips into a recession. Should I liquidate, or continue to invest?
A: You do not need to panic even if the economy ends up sliding into a recession, as we expect any upcoming recession to be mild. Unlike during the global financial crisis in 2008, we do not see serious cracks in the economy.
Also, keep in mind that the economy moves in cycles, and peaks and troughs are common.
This has several implications. Firstly, stay invested because sentiments can turn around quickly, and markets’ best-performing days often occur close to their worst-performing ones. Data shows even missing out on a few of the best-performing days can put a significant dent in your returns.
Next, stock markets are forward-looking and usually rebound ahead of the actual economic recovery. You could miss the next upcycle if you wait to invest only after the economy has emerged from a recession.
Investors are always encouraged to take a long-term view because historically, markets deliver positive monthly returns more often than they do negative ones.
Another way to look at this is that markets follow an upward trajectory over the long run. Do not miss out on the next bull market just because of potential volatility ahead.
Tips to tackle uncertainty
- Solidify your savings and have sufficient insurance coverage
- Identify appropriate investments based on your risk appetite. Consider investment grade bonds, stocks in defensive sectors and growth stocks in this environment
- Diversify your investments across asset classes, sectors and regions
Investors looking to build a well-rounded portfolio that balances risks and returns can consider core and tactical funds available through UOB SimpleInvest on the bank’s TMRW app.
There are also curated fund portfolios like the Income and Growth portfolios, which tap insights from UOB Private Bank’s Chief Investment Office to rebalance the investments as market conditions change.
Rethink Your Wealth provides advice and insights from experts and answers to your money-related questions.
