As hostilities increase in the Middle East and the price of oil goes into panic mode, could this be the trigger for the next and highly predicted recession? The dominant US stock market has enjoyed an almost unprecedented good run since the last recession of 2008/9 which was triggered by the Global Financial Crisis. Bali, Jakarta and other parts of Indonesia have also seen unprecedented levels of growth and development (not all with positive results!) over the same period.
What precisely constitutes a ‘recession’?
A dictionary definition is ‘A period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in Gross Domestic Product (GDP) in two successive quarters.’
It could affect just one country but if it affects the USA then the impact can easily become global. That’s the threat we have at the moment.
What could trigger a recession?
President Trump’s policies of lowering taxes and encouraging people to spend have certainly given a boost to the US economy which is enjoying record high employment. The US stock market has reflected this, and is regularly nudging record highs despite a few small blips along the way. But spending and borrowing comes at a price; someone has to pick up the tab when the party is over. Some analysts believe that time is approaching.
But there are many other factors that could trigger a global recession. While the world is less reliant on Middle East oil than it was 50 years ago a major disruption to supplies from the region could still have a major impact on the price of oil, as we saw in a matter of hours when drones attacked and seriously damaged Saudi Arabian oil facilities earlier this month.
Trump-induced trade wars could also have a major impact on the global economy. At the moment it is still a bit of a poker game, particularly where the two big players, the USA and China are concerned. Brexit, if it goes ahead, can further destabilise international trade. Although the UK will undoubtedly suffer the most Europe also will have to adjust to the loss of one of its biggest trading partners.
Finally, there is the ‘technical trigger’ of the so-called ‘inverted yield’ which occurs when interest rates on short-term bonds are higher than the rates paid by long-term bonds. This has now occurred several times in the past few weeks. Why on earth that should trigger a recession might seem a mystery but that is exactly what has happened in the past. The recessions have not followed immediately but usually 12 to 18 months later. Which means the party could go on a bit longer!
What typically happens in a recession?
Generally unpleasant things like bankruptcies, job losses, loss of homes and cars when loans cannot be repaid, credit dries up making it hard or more expensive to get loans, properties don’t sell and so fall in price, hotels and airlines see a big drop in customers and income, stock markets can fall and the value of savings, investments and pensions can plummet.
What can you do about it?
The worst thing you can do is panic. Far better to step back and determine what are your needs in the short term and what are your long term goals. The short term is the most pressing as you should always be prepared for a worst-case scenario. This means ensuring you have adequate liquid funds available to see you through any period of difficulty resulting from the loss of your job or a big slump in your business.
This is not the best time in the economic cycle to be investing heavily in a consumer-related business or a new, expensive property. Prices invariably fall during a recession, resulting in bargains being available in the latter stages of a recession before the market picks up again.
If you are in the hospitality business a recession presents a good opportunity to close off rooms and get renovations done while there are fewer guests.
What about savings and investments?
People have been talking about a recession for at least a year now. But anyone who decided to cash in their investments a year ago would have missed out this year on double-digit growth in many stocks and commodity markets. Even gold has risen to a six-year high. While we are inevitably a year closer to a recession than we were a year ago we could still see yet another strong year. It is worth bearing mind that President Trump’s top priority is to get re-elected next year. Strong employment figures and a booming stock market could help him reach that goal so you can rest assured he will be using every trick in the book to achieve it.
Having said that, it would still be wise to look at investment sectors that are more recession-proof. A simple example of what happens in a recession is that people delay big purchases like cars or washing machines and cut back on foreign holidays. On the other hand people are unlikely to cut back on cheap meals out such as fast-food restaurants, or beer or toilet rolls!
So clearly, shares and funds that invest in fast-moving consumer goods are more likely to prosper in a recession than car manufacturers or airlines. One area worth moving into is infrastructure where governments usually have deep funding to keep projects going. Income equity funds are also a good place to be as they place the emphasis on strong dividend income which can compensate for falling share prices. Utilities like water and electricity also hold their own in a recession as people are unlikely to cut back on either.
But, provided that you have sufficient protection to see you through a recession you should not radically change any long term plans or pensions. If you are fortunate enough to have surplus cash at your disposal a recession would give you the opportunity to add to your long-term holdings, especially if prices have fallen. It is so often the contrarians who win in the investment game. They buy when others are selling and sell when others are buying. It’s not easy to do when human nature teaches us to follow the herd.
Is there any good news?
Yes. Recessions don’t last forever and are always followed by recoveries. Just think back to 2008 when it looked as if the financial world as we knew it was coming to an end and that the banks would fall like dominoes. It didn’t and the banks (minus one or two) are still standing and if you were invested in the wider US stock market you would have doubled your money between March 2009 and July 2010. Provided you have planned well enough to see you safely through a recession you can actually turn it to your advantage by being first off at the gate for the turnaround.
Colin Bloodworth, Chartered Member of the Chartered Institute for Securities and Investment (UK), has spent over 20 years in Indonesia. He is based in Jakarta but visits Bali regularly. If you have any questions on this article or related topics you can contact at : firstname.lastname@example.org or +62 21 2598 5087.
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Copyright © 2019 Colin Bloodworth