Countries such as the United States and Britain are grappling with inflation that has risen to multi-year highs as the war in Ukraine has led to soaring energy prices and rising food prices.
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Recession talk is heating up, with Wall Street veterans pointing to the rising risk of a recession — and offering advice on how to invest in this cycle.
Investment bank Morgan Stanley said that while a recession is not its base case, it is a bear market case because the risk of a recession “has risen substantially”.
“Needless to say, there are a number of shocks to the economy right now that could send us into recession sometime in the next 12 months,” the investment bank said in a report in May. It cited factors such as the Russian-Ukrainian war The upgrade could push oil prices to $150, an extremely strong dollar, and huge cost pressures for companies.
Wall Street veteran Ed Yardeni said in April that there was a 30 percent chance of a recession, Raised that figure to 40% last weekalthough Citi CEO Jane Fraser told CNBC She firmly believes that Europe is heading for recession.
The war in Ukraine has caused energy prices to soar and food prices to rise. The US and UK – and the rest of the world – are grappling with inflation that has risen to multi-year highs.
major stock indices has fallen sharply Since peaking in late 2021 and early this year, the Nasdaq is down about 23% since early 2022. The S&P 500 is down about 13% over the same period.
Here’s how frantic investors can weather the ongoing stock market volatility, experts say.
As volatility will persist, Morgan Stanley recommended defensive sectors in its May 16 U.S. market outlook report. These include healthcare, utilities and real estate.
“Except for energy, all of the best-performing sectors have come from the defensive end,” Morgan Stanley wrote. “We don’t think defensive stocks will have much absolute outperformance, but they should offer some relative protection because we Calls for lower earnings and multiples will hit cyclical stocks harder.”
Defensive stocks offer stable dividends and yields regardless of overall stock market conditions, while cyclical stocks are stocks that can be affected by economic cycles.
Here’s how Morgan Stanley evaluates three defensive industries:
- health care: Morgan Stanley said that unlike most other defensive sectors, the sector trades below the broader market. The bank prefers large-cap stocks in pharmaceuticals and biotech, adding that they trade at attractive prices and offer relatively attractive dividend yields.
- real estate: Morgan Stanley said the sector rose 42% last year, outperforming the broader U.S. market by 16%. The bank likes the industry’s earnings stability and dividend income.
“Stable cash flow within REITs should provide defensive exposure to market downturns in the year ahead,” Morgan Stanley said.
“In addition, REITs provide built-in inflation protection through lease agreements, rent increases and property appreciation, which will allow the industry to withstand a high inflation environment relatively better than other industries,” it added.
- utility: Valuations have risen, but Morgan Stanley’s optimism about the sector is more about its downside protection than any further upside.
“As nearly all industries grapple with the effects of rising energy costs, established pricing structures within utilities should provide relative protection in this high-cost environment,” it said.
The Wells Fargo Investment Institute said a recession “requires extra patience” to deploy cash for any investment opportunities.
Sameer Samana, senior global market strategist at the consultancy, told CNBC that investors should “slow down” the pace of reinvestment because bear markets can last about a year and sometimes lead to retracements of about 30%.
“During times like these, long-term investors typically diversify,” added Scott Wren, senior global market strategist at Wells Fargo’s Investment Institute. Deploy cash (or longer) and continue to emphasize quality and defense to protect capital.”
Short-term investors with an eye toward six to 18 months could benefit from holding additional cash, Wren said, anticipating an opportunity to enter the market in the coming months.
Buy high-quality bonds and steer clear of junk or high-yield bonds, strategists said.
“As the market moves deeper into the late cycle, we favor quality over junk,” said Morgan Stanley strategists. “Since the shift to a more hawkish Fed in November 2021, we have seen continued quality vs. junk performance. Better than trash.”
Moreover, the attractive income offered by bonds will offset widening spreads in a mild recession, according to U.S. asset manager Nuveen. Yield spread is the difference in yields between government bonds and corporate bonds of the same maturity. It recommends investment-grade corporate bonds.