What to do with your investments during a recession?

The boom is over. Your portfolio value is half of what it was last year. Is it time to cut your losses or buy in? Is this a good time to enter the market? If you find yourself asking these questions, you’re not alone.

The pandemic has forced a global lockdown, ending the longest bull market rally in history. Businesses have shuttered resulting in job losses. Income per capita is expected to drop significantly in 170 countries. Unemployment estimates are rising, the ringgit has declined in value, oil prices have plummeted and investor confidence is low.

The end of the Covid-19 lockdown is near, but the worst is far from over. According to the IMF (International Monetary Fund), the world economy will face the biggest recession since The Great Depression. The Great Lockdown of 2020 is expected to shrink global GDP (gross domestic product) by 3%, compared to the 0.1% decline seen during the global financial crisis of 2008-2009. Both advanced and emerging economies are facing recession as a result of suppressed demand and disruptions in the supply chain.

Latest World Economic Outlook Growth Projections

Source: IMF, World Economic Outlook, April 2020 Note: For India, data and forecasts are presented on a fiscal year basis, with FY2020/2021 starting in April 2020. India’s growth is 0.5 percent in 2020 based on the calendar year.

The Great Lockdown recession is deep, short and sharp. We’ve had to adapt to the New Normal, changing our lifestyles and the way we do business.

To add to the situation, a potential standoff between economic powerhouses China and the United States over the security law in Hong Kong is expected to mute global economic recovery.

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. This results in a vicious cycle with cascading declines in output, employment, income, and sales that feed back into a further drop in output, spreading rapidly from industry to industry and region to region.

Malaysia’s GDP of 0.7% in the first quarter of 2020 is the lowest since 2009. Technically, Malaysia is not yet in recession, but the country’s exposure to international trade could bring recession to our shores in the next few months. Bank Negara expects the economy to contract in the second quarter, reflecting the longer duration of containment measures both globally and domestically.

The exports segment is already slowing, down by 7.1% from a year ago, no thanks to supply chain disruptions at the start of the first quarter, followed by the double whammy of production shutdowns and reduced demand. While export to China, one of Malaysia’s largest trading partners, is expected to improve, exports to two other key destinations the US and Japan will decline, offsetting any positive development in this area.

One positive area is private consumption, bolstered by the Bantuan Prihatin Rakyat handouts, growing 6.7% from the previous year. However, it could be a temporary boost as unemployment rates increase and purchasing power drops as we move further along the CMCO.

Goldman Sachs has forecasted a sharp contraction in advanced economies, with the US registering a 24% decline in GDP. The country is seeing its highest unemployment rate ever, with 22.03 million or 6.7% of the population jobless.

Source: FT, Trading Economics

Recovery is not too far away

Despite the initial worrying figures, there is a sliver of hope. Assuming the global cases continue to reduce in the second half of the year and containment efforts are gradually wound down, the IMF expects the global economy to grow by 5.8% in 2021, aided along by policy support.

China’s commodities industry, the earliest to be hit by the pandemic, is showing signs of recovery, indicating that the rest of the economy will soon follow suit. According to Bloomberg Economics, more than 90% of China’s workforce was back in business at the end of March, and the pickup was reflected in the steel, construction and crude processing industries. Oil refineries and coal-powered plants are nearing pre-Covid production levels, while metals stockpiles have shrunk from record highs.

To help keep the Malaysian economy afloat and aflush with liquidity, Bank Negara has announced a further cut on its overnight policy rate (OPR) to 2%, a level last seen during the 2008-09 global financial crisis. Keeping interest rates low has helped the economy recover before, and it is expected to gradually uplift the economy.

Economic activities are expected to improve in the second half of the year, bolstered by fiscal measures and infrastructure projects. Financially stable companies will be able to leverage on cheaper loans to expand, taking on some of the unemployed. The positive changes will be slow and gradual, with results that will only be reflected in 2022 figures.

Recovery will largely depend on how the pandemic evolves. If a vaccine is found within the next year, we can expect a short spike in growth.

That said, let’s take a broader view. Looking at the KLCI’s journey from 1994 to 2020, we can see healthy rebounds following every major economic crisis. While past performance is not indicative of future results, the pattern still gives us hope.

KCLI Index from 1994 to 2020

Source: Bloomberg and RHB Research & Advisory

The economy moves in cycles consisting of four phases: the peak, recession, trough and recovery/expansion.

Source: www.investopedia.com

What should you do with your investments?

Stay liquid

While you might be tempted by the current conditions to invest as much as you can, it is important to retain cash. Besides maintaining an emergency cash fund of six months’ pay, retain 20-30% cash that can be deployed when the opportunity arises. This will keep you agile and flexible.

Invest in a broad range of asset classes

Imagine running your portfolio like you would a football team – there should be the attacking, midfield and defensive players in a formation that you can change as your risk tolerance evolves over time.

Diversify horizontally and vertically. Selecting the right mix and including passive investments such as unit trust funds or mutual funds will reduce risk, while maintaining steady returns.

Your portfolio can also include one fund that moves in contrast to the market, so you will still get some returns regardless of the market direction.

You can have more than one portfolio as well, each with their own risk approach and investment horizon.

Invest for the long term

This is the largest recession since the Great Depression, and economies may not fully recover for many years. A longer investment horizon of more than five years is recommended, compared with the usual three to five years for a retirement fund. You want good returns regardless of economic conditions.

Adopt the right mindset

The market will always have its ups and downs and you won’t be able to reap the winnings all the time. No one can consistently predict the lowest and highest points. It’s normal to feel panic and doubt. Take a rational approach to your decisions.

Evaluate your investments

Reallocate your funds to make the most of new opportunities. Your financial adviser will help you decide which to buy or sell. It would be wise to include “recession-proof” investments, such as government bonds, as a safety net.

Only invest money that you have

Don’t be tempted to borrow to invest even though interest rates are low. You cannot control interest rates, so you could soon find your repayments higher than your returns. You can consider Amanah Saham Bumiputra (ASB) or ASB Financing if you are a bumiputera who seeks consistent returns with little to no risk.

Don’t rely on the algorithm

Digital investment platforms have become increasingly popular over the last decade. These use an algorithm to make trades, which makes them more effective for developed markets where information is consistent and perfect. In emerging markets, active managers outperform digital platforms over the longer term. An active manager or adviser can also provide insight and remind you of your goals.

Is now a good time to invest?

The current market is very volatile, and Trump’s accusation that China leaked the virus from a lab in Wuhan isn’t helping matters. While it might seem like bad news to most investors, there will always be that opportunist who sees the upside. Could that be you?

There isn’t a one-size fits all approach to investing. Your risk profile depends on what your goals are, your age group, how much you have already saved and how much you have to invest. Determining your risk profile will help you map out the right strategy and the right mix of investments.

The rule of thumb is “higher risk, higher returns”, but that doesn’t mean you should take on more risk than necessary. Diversification plays an important role in reducing risk because it takes the focus away from any one asset class.

Equities, for example, is riskier than fixed income, but your portfolio should include the right balance of both. Investing in different regions and sectors also mitigates risk.

After determining your risk appetite and your investment horizon, test the waters by investing your money in several tranches, say, 40% of your total, then 30% and so on. Like building a football team around core players, pick three to five core funds as the foundation of your portfolio. Starting off with core funds gives you agility by allowing you to build up your base and slowly add on other funds as “satellites” from time to time as the market direction, and your risk appetite, change over time.

Regardless of your risk profile, however, it is important to pace your investments into uniform tranches as a dollar cost averaging approach.

As an investor with RHB, your risk profile will be classified under one of six categories: Secure, Conservative, Income, Balance, Aggressive and Speculative.

Because investing always comes with some level of risk, there aren’t many options for Secure and Conservative investors who prefer risk-free investments and have limited tolerance for negative price movements.

The table below explains the other categories.

Investment products to consider

Fixed Income

Relatively low interest rates and quantitative easing (QE) measures by central banks have improved liquidity of the global bond markets, leading to an inflation of bond prices. Bank Negara has lowered the statutory reserve requirement (SRR) ratio to 2%, which could ease the flow of funds. This scenario presents a strong case for fixed income, and the hunt for yield income has resurfaced. To be safe, we will stick to investment grade bonds as a safe haven from rising credit risk.

Equities

Instead of exiting, we recommend that investors stay in the game, investing in large cap stocks with a stable revenue and a wide buffer. Funds with less exposure to volatility are preferred as their performance is more resilient. We’ve also highlighted China as the country is set to recover from the effects of Covid-19 ahead of the rest of the world.

Range Accrual Products

This is a structured product that is based on an underlying index, such as the KLIBOR, interest rates, commodities or exchange rates. Potential returns can be maximised provided the index stays within the product’s defined range.

Dual-currency Investment (DCI)

This is a structured investment product linked to foreign exchange rates. Its performance is linked to the performance of paired currencies, allowing the investor to enjoy potentially higher returns compared with traditional deposits.

Retail Bonds

In simple terms, bonds are an IOU issued by companies or governments when you lend them your money. They come with a promise or guarantee of the principal amount and the time frame during which they will pay interest to you. Retail bonds are tradable.

Whether you are getting started or want to reevaluate your portfolio, contact your Relationship Manager and check how we can help you to grow your wealth. how we can help you make the most of your investments.

Sources : 1. Gita Gopinath, The Great Lockdown: Worst Economic Downturn Since the Great Depression, International Monetary Fund, 20 April, 2020. 2. Wellian Wiranto, Commentary: Malaysia’s economy has surprised many despite COVID-19. But for how long more?, Channel News Asia, 20 May 2020 3. https://www.investopedia.com/terms/b/businesscycle.asp