Tips for investing in stocks in times of recession

The Federal Reserve has recently raised the Interest rate by 0,75%, the largest increase since 1994, a blow to the table that does not bode well for investment in shares. There is a lot of talk about a recession, but it is not the only card being shuffled on the table. We have investigated thoroughly and have proposed four possible scenarios. Let's take a look at each of them to see how we can adapt them to our investment in stocks. 

Scenario 1: The arrival of recession​

By far, it is the most likely scenario. The US economy enters a recession when the Fed raises interest rates in response to high inflation, causing the recession to spread. China's Covid containment policies are likely to have led the country's economy to contract this quarter compared to last, and the eurozone and UK economies are likely to contract later this year, due largely due to the very high prices of the energy sector. In the United States, there has already been a quarter of negative economic growth, and we are seeing a slowdown in investment in stocks and the consumer discretionary sector. 

Points to watch for a possible recession ​

Historically, when inflation is so high and unemployment so low, it is nearly impossible for the Fed to raise rates without causing a recession. As businesses and consumers respond to higher rates with slower spending, stock investing is expected to fall into a recession late next year. A shrinking US economy will hit developed trading partners like Europe hard, causing safe-haven investors to dump emerging market assets, putting pressure on those currencies and economies, and pushing the world into recession. .

Any stock investment opportunities?​

US interest rates will continue to rise between now and mid-2023. And US banks tend to benefit more from higher interest rates because they can raise their "net interest margin" (the gap between the interest they charge borrowers and what they pay savers) which, other things being equal, flows through higher profits.

Scenario 2: The Fed achieves a “soft landing” ​

This scenario is the most desired by the vast majority. The Federal Reserve and other central banks continue to raise rates to combat inflation, causing a slowdown in economic growth, but not a recession.

Points to observe for a soft landing​

To detect whether this scenario is playing out, we should see Fed rates rising above 2,5% by the end of this year. The slowdown in wage growth and unemployment may also indicate that the Fed is managing to land this situation softly. It is estimated that global economic growth and inflation will be at least 2,5% above current forecasts within two years. 

Any stock investment opportunities?​

In addition to banks benefiting from rising interest rates, investors may benefit from an unexpected rebound in demand if there is a soft landing. This could boost investment in consumer discretionary stocks, financials and real estate, as well as the automotive sector.

Scenario 3: Supply-side recovery️​

In this scenario, supply chain disruptions fade quickly and labor supply recovers sharply. This could be thanks to a shift in demand from goods to services, which would relieve pricing pressure on physical goods, hopefully without creating similar pressures on services. This would mean inflation would fall faster than expected, and central banks would need to raise rates less than they are currently expected to do.

Points to observe for a recovery in supply​

We would need to see a rapid recovery in labor market participation, a sharp decline in supply chain disruptions and production delays, and a stabilization of service industry prices even as demand continues to rise. It is estimated that it would boost global economic growth by 4,5% within two years and inflation by only 1% compared to current forecasts.

Any stock investment opportunities?​

With lower inflation, we could see lower interest rates, which could be a big incentive for stock investing to get back on track. This would lead to the buyback of assets that previously lost steam due to fears of a prolonged cycle of rate hikes and inflation. Therefore, growth stocks, Tech stocks, in particular, could once again favor investors, as could cryptocurrency investing, which has proven to be a risky sector over the past few months.

Scenario 4: The arrival of stagflation​

In this scenario, geopolitical tensions would drive a new rise in commodity prices. raw materials and again we could see disruptions in the production and transportation of goods. This means supply chain issues will last even longer than expected and inflation will stay high for longer. This would force us consumers to control our spending even more and would increase pressure on central banks to raise interest rates more quickly and aggressively, as the global economy stagnates and several regions fall into recession. The eurozone would be at particular risk, in this scenario, given its dependence on Russian energy.

Points to observe for possible stagflation​

Spikes in energy, food and metals prices could suggest we are headed for a period of stagflation. The prices of goods and services do not stop growing and business surveys show a drop in consumer activity and confidence. This is partly caused by continuously growing inflation, where central banks do not immediately respond with interest rate increases. In this scenario, global economic growth is projected to be 1% higher than current forecasts two years from now. Instead, inflation would be 5% higher from current levels.

Any stock investment opportunities?​

Defense may be the best attack for investors. Investing in stocks in defensive sectors such as consumer staples, healthcare and telecommunications offer products that people need to buy regardless of the state of the economy. They should therefore be better able to apply price increases to their customers while maintaining stable profit margins.