Outlooks and forecasts for 2023 are wildly contrasting but primarily gloomy, with the prospect of ongoing global inflation, recession, and instability – but it is vital to remember that even where economies experience a recession, it does not affect every sector or industry.
Market volatility isn’t new and has been around for much of the last three years and even before the pandemic, but there are plenty of ways to safeguard your wealth and make future-proof investment decisions.
In this article we summarise some of the available forecasts, explore the uncertainties, and show you some opportunities to manage finances safely, even in unusual times.
Economic Forecasts for 2023
The first place to begin preparing for changes to your investment approach or reviewing your portfolio strategy is to examine the predicted economic climate for the year ahead.
One useful resource is the World Economic Outlook, published bi-annually by the International Monetary Fund, analysing global economics. The latest report from October 2022 states that:
- Global growth is expected to drop from 6% in 2021 to 3.2% this year and 2.7% in 2023.
- Inflation is forecast to reach 8.8% in 2022 but fall to 6.5% in 2023 and 4.1% in 2024.
The report also reflects on the numerous factors contributing to the slowdown, including the pandemic, worldwide inflation, a dip in Chinese production and the Russian invasion of Ukraine. This longer-term view is useful from an investment perspective because it considers what may happen a year or two ahead, rather than solely focusing on difficult economic circumstances at present.
For example, if you are investing as part of a retirement strategy intended to crystallise in 20 years, the forecast halving of global inflation may mean that you decide not to make any dramatic changes in response to current inflation levels.
The variance between forecasts is also significant and means a measured response is far preferable to relying on one source of information to make fundamental financial decisions.
Forbes reported in August that several economists were predicting a 2023 recession, although expectations for the US varied from 0.1% growth to a -0.4% backslide.
How to Prepare Your Portfolio for the Year Ahead
The natural response to speculation around recession is to try and avoid it altogether – but the reality is that stock market sell offs and recessions are cyclical and are not entirely unexpected over a long-term investment period.
However, investors, particularly expats with financial products and assets held across borders, can take pre-emptive steps to ensure their wealth is not unnecessarily exposed to risk.
Here are some of the actions we might recommend, which become more important if you have yet to have a recent portfolio review or are uncertain about how your investments are currently performing.
Focus on High-Quality, Long-Term Investments
Most recessions don’t last for extended periods, but the best option is to ensure that any stocks in your portfolio are assets you are happy to hold for longer if a recession becomes prolonged.
Defensive stocks held in reliable, established businesses with solid financial backing and good dividend levels are preferable – even if more volatile stocks offer higher immediate returns.
Selling investments in a bear market or recession is rarely, if ever, ideal since it inevitably means you will achieve a far lower valuation.
Consider Your Cash Liquidity
Investors normally have a maintenance cash position alongside portfolio assets, which acts as an emergency fund – selling stocks at a time when many equities have shed value to raise cash is unlikely to be beneficial.
Although cash savings do not achieve anything close to the returns of an investment fund or financial product, it is important to cover all the bases and ensure you are prepared.
An unexpected cost during a recession may be harder to finance by liquidating portfolio assets and could damage your future expected returns by selling during difficult market conditions.
Revisit Your Investment Risk
Risk exposure and management is a significant theme within the investment world and requires diligent oversight to ensure that, if risk spikes, you have a balancing hedge or the information you need to make clear judgments about the right move.
Likewise, accepting minimal risk may seem attractive when a recession is likely. Still, it could mean veering away from your investment objectives in response to a normally short-term economic blip.
The best approach is to schedule a full portfolio review with an experienced investment adviser or wealth manager to refresh your strategy, identify areas of concern, or reassure yourself that your existing approach is stable and effective.
Recession-Proof Expat Investment Advice
Every investment, financial vehicle or product carries an element of risk. Although some sectors are thought to be ‘recession-proof’, the important factor is ensuring you have a calculated risk exposure that meets your requirements.
Investors can bolster their portfolios with defensive assets to offset risk or avoid having excess cash reserves, which will not provide any return. Utility stocks, passive investment assets and low-volatility funds may be preferable, but this depends on your existing portfolio balance.
Defensive stocks include assets with limited exposure to economic fluctuations, and a strong performance history, irrespective of the external market conditions.
- Healthcare – funds and stocks in medical services, development, healthcare tech and pharmaceuticals.
- Consumer goods – shares or funds in businesses or sectors that produce products or commodities with stable, ongoing demand.
- Utilities – infrastructure, waste management, recycling, power lines, utility providers and renewable energy businesses.
Other industries considered immune to recessions include transportation, accountancy, and repair services – those things that businesses and individuals will always need, regardless of how the economy is performing.
The caveat is that there is no risk-exempt strategy, and even low-risk fixed-rate bonds may become less attractive during a recession if the terms and returns offered are uncompetitive.
Investors cannot fully insulate themselves from the impact of a recession, and even high-performing investment funds or stocks can react badly if investor confidence drops – the best approach is to focus on financial fundamentals and keep an eye on the long term.
For more advice about preparing your portfolio for 2023, assessing your current risk exposure levels, or scheduling a full portfolio review, please contact your nearest Chase Buchanan office at your convenience.