Should you be afraid of the looming recession? And what to do about it…
US bond markets recently went into inversion. This is when short-term interest rates are higher than long-term interest rates.
And what this can mean is a recession is around the corner. In this case, markets are anticipating a recession sometime in the next 6 to 24 months.
But, even if you don't look at such a “technical” indicator, it should be clear the risk of recession is high.
The US Federal Reserve is planning to hike the federal funds rate significantly over the next year or two. Historically such moves have tended to lead to contractions. In the 1980s the Fed used similar tactics to fight spiralling inflation. The move led to a severe downturn in the US economy.
Unemployment in the US came in above 10%. Even the recession of 2008 was preceded by a rate hiking cycle.
The reason the Fed is hiking rates is largely thanks to the spike in inflation over that last year or so. Initially this was driven by supply chain issues caused by the Covid-19 pandemic. However, the picture has deteriorated further. We may now be entering another round of price hikes, as the Russia/Ukraine war continues.
None of the high inflation print’s we’ve seen recently reflected the impact of the war. Economic inflation data are usually backward looking. For example, South Africa will only start to see the impact of Putin’s campaign on our inflation figures in April.
Even without the war, supply disruptions are usually enough to trigger an economic contraction. You can see this in the energy crises of the 1970s.
As a financial market participant however, you need to look forward. That means not only do you have to try to incorporate the very high probability of a global recession into your thinking, but you also have to try to price the multiple black swan events that may occur because of war.
And I’m not even talking about the use of weapons of mass destruction. A cyberattack targeting western financial market or perhaps attacking western infrastructure. Global unrest due to higher food prices. The possible end of the US dollar's status as a reserve currency. Any one of these could be enough to push the world into a deep recession.
Could we have reached the era of Value...finally?
If you just take a look at the South African JSE, there are some of the best value plays on the market right now.
With bloated share prices of most growth stocks particulrly in the tech sector and inflation and recession looming, this really is the time to be seeking out value stocks on the market. And this is exactly what Francois Joubert has done. If you want to know what details on his five best value plays right now then go here.
So how should you invest when things look this ominous?
Let’s look at the major asset classes.
Firstly, you cannot simply wait in cash to see what happens. In the current inflation environment, you could end up losing more than 10% per year in real terms. Cash is simply not an option anymore.
Bonds, the usual “safe haven”, are likely to be under pressure due to rising interest rates. Bond prices tend to fall as interest rates rise. Even if you hold a direct bond investment to duration, in a tightening environment, the interest rate you get today will not look nearly as attractive in a few years’ time.
So, you could look at equity markets. The challenge for many investors however is that equity markets are very volatile. More conservative investors, or investors that may need to access their capital in less than 5 years, cannot afford to take the risk that higher interest rates push their stock portfolios lower. Remember, high interest rates make it expensive to fund new projects and the higher cost of capital eats into profits of very leveraged businesses.
On the flip side, over the last decade or so, central banks have been very quick to cave to market pressure. It’s entirely possible if a recession does occur (and market begins to fall aggressively) central bankers may halt the rate hiking cycle and become more dovish.
How this structured product can protect you from the downside
You see the real challenge for many equity investors is the uncertainty. It’s absolutely fine if you’re tucking money away for the next 10 to 15 years but, if you need a more defined return, equities can be challenging.
This is where I’ve sourced a fantastic new product for you. It only runs for 3.5 years so perfect for those with a medium length time horizon. The other features are as follows:
1. It offers geared upside to the equity market. If markets go up 1%, you will go up at least 1.35%. That means if you put in R100,000, and the central banks come to the rescue and markets shoot up 50% over the next three years, you’ll get 67.5% return or R167,500 paid back to your account in 3.5 years. You will outperform in an upmarket.
2. On the other hand, there is hard capital protection built into the instrument. So, if the world does collapse, you have a level of protection included. This specific product has a “hard” 15% downside protection. That means even if the market breaches the 15% you are still protected. If the market falls 20% in three-and-a-half years’ time, you will only take a 5% drawdown (20% minus 15% protection). Basically, you outperform the market again.
3. Finally, I have a couple of versions of this product available depending on client requirement, but the simplest version can take deposits of as little as R100,000. It only requires an EFT to a local stockbroking account.
This specific product will close on the 20th of April 2022. As with all the structured products, if you don’t get your application in before this date you will miss the opportunity entirely. You will not be able to buy this product after this date.
The product house has asked us not to reveal the name in a public platform like Trading Tips as structured products are sophisticated instruments that do require some level of advice for the retail market.
That said, it would be my pleasure to give you the name and full details of the product directly. All you need to do is send your name and email to firstname.lastname@example.org and I’ll contact you directly.