Last Updated on Tuesday, 21 March, 2023 at 9:21 am by Andre Camilleri
The investment market expectations for this year, the understanding of the implications of a recession on creating long-term wealth, as well as the ability to position a portfolio to withstand the effects of a recession were some of the key themes covered by Mike Coop, Morningstar’s EMEA chief Investment officer during the latest in the series of medirectalk sessions, organised by MeDirect Malta.
The online event provided investors with the opportunity to gain insights into what to expect this year, how to prepare for the future, which areas to avoid in terms of investments and where to tap opportunities – all within the political and economic uncertainties which continue to impact global markets.
Coop started with explaining that a recession is caused when 25% of industries are contracting. Quoting US data, he said that the deep recessions of 1973, 1982, 2008 and 2020 occurred when 40% or more of industries, including the larger ones, were contracting. The eurozone, he said, recorded a dramatic slowdown economic growth in the second half of 2022, with the result that there are big changes in expectations about future economic activity and the chances of a recession.
He said that the more recent recessions are not lasting as long as they used to in the past, mainly due to national governments getting better at stopping self-reinforcing recessions. Coop added that it is hard to forecast how long recessions will last and that most forecasts are not accurate, especially in terms of the magnitude of recessions.
In terms of investments, he said that recession-proof assets tend to have lower returns. Therefore, this creates an opportunity cost in building an investment portfolio only for recession. He said that during a recession, it is advisable to own government bonds and that diversifying the sectors of investment helps preserve capital. He said that industries tied to essential services, such as consumer staples, healthcare and utilities are less impacted during recessions.
Coop said that today’s markets offer much better value than 12 months ago, with select emerging market equities and countries like Germany remaining attractive propositions. He said that the Yen and government bonds offer diversification potential.
During the interactive Q&A session, Coop was asked about inflation. He said there is still uncertainty on how inflation will play out, when the cost of living will stabilise and whether prices will come down to the levels they were before.
He referred to the Covid-19 pandemic and the fact that during that recession, governments found ways to buy assets to make sure the impact was reduced. Coop said that it is likely that in the eventuality of a near future recession, governments will be less able to respond, especially as interest rates are increasing as a response to inflationary pressures.
The Morningstar expert referred to the war in Ukraine and said that no one had forecasted that it would occur and that there is no sign that it will end any time soon. He said that the increasing energy costs, sanctions and other economic and political factors have a recessionary and inflationary impact.
Coop answered a question on the sectors that one should invest in and are attractive given the present market conditions. He said the healthcare and communication services remain good sectors to invest in.
One can view the latest medirectalk as well as prior events by visiting https://www.medirect.com.mt/invest/medirectalk/