Trading strategies for investors worried about rising recession risks
[ad_1]
Inflation has reached multi-year heights in countries like the U.S., U.K. as a result of the Ukraine war. Food and energy prices have risen and so has inflation.
Angela Weiss | AFP | Getty Images
Talk of a recession is heating up, with Wall Street veterans flagging the rising risks of a downturn — and offering advice on how to invest during this cycle.
Morgan Stanley Investment Bank said that although a recession may not be its base case it was its bear case as the risk of one having occurred has “risen materially.”
According to an investment bank’s May report, “Needless-to-say there are many shocks affecting the economy at the moment that could tip the country over into recession at any point during the next 12 month.” The bank cited the escalation in the Russia-Ukraine conflict that could push oil prices up to $150 and the very strong dollar as factors. It also referred to the crushing cost pressures facing companies.
Wall Street legend Ed Yardeni said that there was a 30% chance for a recession in April. last week raised that figure to 40%While Citi CEO Jane Fraser told CNBCHer conviction was that Europe is heading towards a recession.
Energy prices and food prices rose due to Ukraine’s war. The U.S. and U.K. — and other countries around the world — are grappling with inflation that has risen to multi-year highs.
Important stock indexes have posted steep declines since peaking late in 2021 and early this year, with the Nasdaq losing around 23% since the beginning of 2022. The S&P 500 has dropped about 13% in the same period.
The experts have provided some tips on how to ride the market’s persistent volatility.
1. These three areas are available for purchase
Morgan Stanley, in its May 16 U.S. stock outlook report recommended that defensive sectors be considered as volatility will not abate. These include real estate, utilities, and health care.
Morgan Stanley stated that, “With the possible exception of Energy,” all the best performing sectors came from the defensive side of the spectrum. We don’t believe that defensives can have an exceptional run of absolute performance, but they should provide some relative protection since our demand for lower earnings would impact cyclicals more.
While defensive stocks can provide steady dividends and earnings, regardless of what the stock market is doing, cyclical stocks are stocks that could be affected by economic cycles.
Morgan Stanley has this to say about the three defense sectors.
- Health careMorgan Stanley says that the sector trades at an attractive discount to its overall market. This is unlike other defensive segments. According to Morgan Stanley, large-cap stocks are preferred in pharmaceuticals or biotech.
- Real estateMorgan Stanley stated that this sector has outperformed other U.S. markets by 16% and gained 42% in the last year. This sector is favored by the bank for its stability in earnings and high dividend yields.
Morgan Stanley stated that “The constant cash flow within REITS should provide defense against market downswings over the coming year.”
The sector is expected to be able to weather the high inflation environment more effectively than any other by having REITS built in inflation protection. This includes rent rises, lease agreements and property appreciation.
- UtilitiesMorgan Stanley sees the value of this sector as being already high, and is positive that it will continue to be so.
It stated that almost all industries are dealing with rising energy prices and the Utilities’ set pricing should offer some protection.
2. Be patient
Wells Fargo Investment Institute stated that a recession can “require extra patience” when it comes to deploying money for investments opportunities.
CNBC spoke with Sameer Samana from the firm’s senior global market strategist. Bear markets last around a year and can sometimes lead to drawdowns up to 30%.
Scott Wren (senior global market strategist at Wells Fargo Investment Institute) said that long-term investors often diversify in times such as these. In order to protect capital, we recommend an incremental strategy to use cash for the next year. We also suggest that quality and defense be maintained.
Wren said that short-term investors who have a six- to 18 month time horizon may be able to benefit from additional cash. They also might expect to see opportunities to get into the market over the next months.
3. Purchase investment-grade bonds
Buy quality bonds, and steer clear of junk — or high-yield — bonds, the strategists said.
“We hold a preference for quality over junk as markets dive deeper into late cycle,” Morgan Stanley strategists said. Since November 2021, when the Fed became more hawkish, we have witnessed a sustained increase in quality performance over junk.
Nuveen states that the benefits of bonds offering attractive income would outweigh the negative effects of spreads increasing in an economic recession. Yield spreads are the differences in yields between corporate bonds and government bonds over the same tenure. It suggests investment-grade corporate bonds.
[ad_2]