There is a growing likelihood that after a year 2022 driven 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 families who are changing their investment plans for fear of a recession in 2023.
We already remember what an economic downturn is. This is negative GDP growth over a year. When a recession lasts several years, it is called an economic depression, as was the case during the Great Depression of the 1930s.
For the year 2023, the likelihood of a recession is strong as all of the economic indicators that allow you to anticipate it are in red.
There are a multitude of economic barometers that can be used to anticipate the onset of a recession, but we will only mention 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 risk of debt 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 putting his money into a futures account.
When long-term rates are less lucrative than short-term rates, it is simply because short-term money is expensive because it is sought after by companies that need cash now, while medium to long-term economic growth prospects are not. existing or weak. This is a strong omen of an economic downturn.
Since the 1990s, the inverse difference between long-term and short-term rates has never been greater.
We can therefore conclude that there is a very high probability of a recession for 2023, based on this economic indicator alone.
The price of oil
The price of oil is very sensitive to economic downturns, this is what we saw during the Covid-19 crisis when world economies were at a standstill. The price of oil has fallen so low that it has even reached negative quotations.
After a sharp increase in the price per barrel in 2022, oil prices have suffered a loss of more than 40% in the last 6 months. Furthermore, as analyst Vincent Ganne pointed out on his late November 2022 show, oil producers have gone sharply short on oil to protect themselves from a steeper decline to come, which constitutes a second strong warning sign 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 almost certainly predict the arrival of an economic recession in 2023.
Every economic downturn has led to a decline in the markets Actions. Over the last hundred years we have seen a decline in equity markets during the years of recession, declines ranging from 15 to 50% (-35% on average over the S&P500).
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, that doesn’t mean there’s nothing you can do for your wallet, and that’s what we’ll cover in the rest of this article.
Hedging your portfolio in the event of a recession
The first thing you need to do to protect yourself from a steep market decline in 2023 is to hedge your portfolio. Rather than sell all the securities, which could generate costs and deprive you of any payment of dividends, it is common for wealth management professionals to hedge their investments. Individual investors also have the tools to hedge their portfolio.
Depending on your stockbroker, it will be possible to use EF extensionof the Options or some Turbo. Be careful though, because these derivative products are not without risk, they can involve significant losses and costs.
It is therefore necessary to study to what extent it will be relevant to hedge your portfolio, especially since it is necessary to qualify the forecasts of analysts because the year 2022 has seen a decline of 27%, it could therefore be that most of the decline is already at our shoulders.
Long-term investing in accumulation in low markets
Periods of steep downturns can also present an opportunity to buy the markets down. As we often recommend, setting up a strategy to spread your investments over time is a proven technique. Downturns may allow investors to use a investment plan or DCA’s strategy of working hard to take advantage of low prices to accumulate more stocks or ETFs.
In a recession, favor some sectors
In a period of recession, even if world stock markets risk collapsing, there will still be sectors that will suffer less than others, and will even benefit from the economic situation.
As a general rule, the healthcare sector is little or not affected during a recession. It might therefore be wise to look at sector trackers on the health theme, such as the Lyxor MSCI World Health Care ETF, or the Amundi S&P Global Health Care ESG ETF.
If key rates don’t come down, the banking sector it could also be spared the recession, to some extent of course. You will then need to look into bank stocks or ETFs such as Lyxor World Financials or Amundi S&P Global Financials.
The third sector that may be interesting to monitor is themotionlessobviously provided that in 2023 a stabilization or even the beginning of a reduction in the reference rates is observed.
Bottom line, defensive consumer stocks are always a wise choice when things go wrong economically, and that’s what we’ll look at now.
Defensive consumption values
Defensive consumer stocks are stocks of companies that sell consumer staples and food.
Even in a downturn, defensive consumer stocks continue to produce and sell their output, and even continue to grow.
This sector includes companies such as Nestlé, DanoneMondelez or General Mill for food, but also P&G, Unilever or Colgate-Palmolive for companies that produce basic necessities.
Invest in commodities
With the exception of oil, raw material agriculture too precious metals it can offer some protection for your capital during a recession. It will then be possible to buy them physically (especially for precious metals) or via tracker. Other types of derivative products, such as futures contracts, also allow for positioning in many agricultural commodities.
Also check out our guide Stock broker: 10 tips for choosing the best online broker in 2023
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