How To Protect Your Portfolio In The Event Of A Recession?

There is a growing likelihood that after a year 2022 led by inflation and rate hikes, 2023 will be a year of economic recession. We will therefore see in this article how to protect your portfolio in the event of a global recession.


Probability of recession and economic barometer to watch

The economic recession is on everyone's lips lately. It is not only economists who are talking about it, but also more and more households who are changing their investment plans due to the fear of a recession for 2023. Let us already recall what an economic recession is. This is negative GDP growth over one year. When a recession lasts for several years, it is called an economic depression, as was the case during the Great Depression of the 1930s.

For the year 2023, the probability of a recession is strong since all the economic indicators which make it possible to anticipate it are in the red. There are a multitude of economic barometers that can be used to anticipate the onset of a recession, but we are going to cite only two economic indicators here that seem to us to be the most relevant.

The inversion of the interest rate curve

Logically and in normal times, the borrowing risk is higher in the long term and the long-term rate is therefore more profitable. Conversely, the risk is lower in the short term and the rate is also less profitable. This is what an investor can see by placing his money in a term account.

When long-term rates are less profitable than short-term rates, it is quite simply because short-term money is expensive because it is sought after by companies that need cash now, while economic growth prospects in the medium and long term are non-existent or weak. This is a strong harbinger of an economic recession.

Since the 1990s, the inverted difference between long-term rates and short-term rates has never been so strong. We can therefore conclude that there is a very high probability of a recession for 2023, on the sole basis of this economic indicator.

The price of oil

The price of oil is very sensitive to economic recessions, this is what we saw during the Covid-19 crisis, when the world's economies were at a standstill. The price of oil has sunk so low that it has even reached negative prices.

After a sharp rise in the price per barrel in 2022, oil prices have suffered a loss of more than 40% in the last 6 months. In addition, as analyst Vincent Ganne pointed out in his show at the end of November 2022, oil producers went net short on oil in order to hedge against a steeper decline to come, which constitutes a second strong warning signal. of a period of recession for 2023.

The consequences of a recession on the financial markets

It is because of the information we have just seen that many economists predict with near certainty the arrival of an economic recession in 2023. Each situation of economic recession has led to a decline in equity markets. Over the past hundred years, we have seen a decline in stock markets during the recession years, declines ranging from 15 to 50% (-35% on average on the S&P 500).

If it is therefore confirmed that the year 2023 plunges the world's economies into a period of recession, and as some economists like to say: "there will be nowhere to hide". However, this does not mean that there is nothing to do for your wallet, and this is what we will see in the rest of this article.

Hedging your portfolio in the event of a recession

The first thing to do to protect yourself against a sharp drop in the markets in 2023 is to hedge your portfolio. Rather than selling all of the securities, which could generate costs and deprive you of the possible payment of dividends, it is common for asset management professionals to hedge their investments. Individual investors also have the tools to hedge their portfolio.

Depending on your stock broker, it will be possible to use ETFs, Options or Turbos. Be careful though, because these derivatives are not without risk, they can lead to significant losses and costs. Therefore, choose a top-rated broker and start trading. It is therefore necessary to study to what extent it will be relevant to hedge one's portfolio, especially since it is necessary to qualify analysts' forecasts because the year 2022 has seen a drop of 27%, it could therefore be that the bulk of the decline is already behind us.

Investing for the long term in accumulation in low markets

Periods of sharp declines can also represent an opportunity to buy the markets at the bottom. It is recommended that setting up a strategy to stagger your investments over time is a proven technique. Periods of recession can allow investors using an investment plan or DCA strategy to work "on their feet", in order to take advantage of low prices to accumulate more stocks or ETFs.

In a recession, favor certain sectors

In a period of recession, although the world stock markets are likely to fall, there will however be sectors that will suffer less than others, and even benefit from the economic situation. As a general rule, the health sector is little or not affected during a recession. It could therefore be wise to look at sector trackers on the theme of health, such as the ETF Lyxor MSCI World Health Care, or the ETF Amundi S&P Global Health Care ESG.

If key rates do not fall, the banking sector could also be spared from the recession, to a certain extent of course. It will then be necessary to look at banking stocks or ETFs such as Lyxor World Financials or Amundi S&P Global Financials. The third sector that it may be interesting to monitor is real estate, provided of course that we observe in 2023 a stabilization, or even the beginning of a reduction in key rates.

To conclude, defensive consumption stocks are always a wise choice when everything is going badly from an economic point of view, and that's what we're going to see now.

More By This Author:

Is Police Starting To Use Blockchain To Protect Informants' Anonymity?
Florida Is Most Equipped For A Wide-Spread Crypto Adaption Of All U.S. States
How The Metaverse Will Change Cryptocurrency

Disclaimer: This article is not investment advice.

How did you like this article? Let us know so we can better customize your reading experience.


Leave a comment to automatically be entered into our contest to win a free Echo Show.