The first part of the above image is of the Merdeka, 118 tower in Malaysia, the world’s second tallest skyscraper, finished by 2021.

Second, the sales figure of men’s underwear and lipsticks is under the radar for many like in previous years, courtesy of Alan Greenspan, former Federal Reserve Head. He proposes that men’s underwear sales decline in tough times. Likewise, the lipstick effect and hemline effect make headlines often.

Third, the thing analyst globally are fretting over – the FED rate hike of 75 basis points for a third time and the associated ‘inverted yield curve.’

The common thread between the three images above is that they are all indicators of recession.

And as expected, accompanying these developments, searches for the word ‘RECESSION’ has peaked.

With this, Dr. Doom is back! Nouriel Roubini warns of a prolonged ugly recession, increasing investors’ worry. He is the economist who correctly predicted the 2008 financial crisis. But, most of his predictions have been wrong in the past. 

What does all of this hold for you as an investor?

1. Last week has been significant as the central banks globally have been active. Lending rates in the USA rose to the highest since the global financial crisis after the Fed rate hike on Wednesday. With this, a reduction in personal and corporate borrowing is expected, impacting economic growth in the long run. 

2. The Central Bank of Japan tried to shore up the value of its currency on Thursday by buying yen and selling U.S. dollars for the first time in 24 years. The last intervention was done during the Asian financial crisis in 1998.

3. India is in no different situation with RBI’s hawkish monetary stance observed in the last MPC meeting. RBI is expected to hike the repo rate by 0.5% this week. 

4. ‘Inverted yield curve’ is a harsh reality, with the yield for a 10-year U.S. government bond equal to 3.73%, while for a two-year bond, it was 4.24% as on 25 September 2022. The shape of the yield curve reflects the investor’s expectations for a decline in long-term interest rates, implying increased uncertainty. Historically, the yield curve has inverted before the last five U.S. recessions.

5. The impact of the U.S. economy has a ripple effect worldwide amidst the Russia Ukraine conflict. Though the prediction of recession has been correct in the past, no one can be sure of the exact crisis timeline.

6. Remember, every asset class has its function in the portfolio! Diversification is important.

1. Equity is expected to show higher volatility. Indeed, equities carry a higher risk than bonds, but equity becomes cheap during a market downturn. Keep calm and keep an eye on adding more equity to your portfolio at an attractive valuation.

2. Debt has a place inside the portfolio, more so for people wanting stable cash flows! And even more so in the rising interest rate case, as is the present situation.

3. The bond market offers an investor various alternatives, ranging from low-duration bonds to sovereign gold and government bonds. Not every bond trading in the market is risk-free. Some of the bonds carry substantial risk, and one should be able to distinguish based on analysis.

4. Getting the basics right is essential. Understand the concept of yield to maturity (YTM), Duration and Interest rate risk, Call risk and credit default risk, etc.

5. Do not ignore the impact of rising interest rates on real estate as an asset class. As seen in the past, property prices tends to correct or goes through time correction whenever the interest rates go up. Higher interest rates make acquisition costs of the new assets more expensive if borrowings finance real estate expansions. 

6. Don’t forget the contingency fund to deal with highhanded economic uncertainties (including the pandemic exigencies), worth 10 – 12 months of living expenses or total income (though there is no one size fits all approach). Your emergency fund must comprise liquid assets like cash and short term debt funds, which will not only reduce financial stress but also shield you from assuming high-cost debt.

Keep watching the conventional and unconventional indicators of recession.

Mirror mirror on the wall, ….. is a recession indicator of all!! 

Best Regards

 
Ms. Tarunika Jain Agarwal Ph.D. 

Alpha Research