2nd half 2022. How to position for a slump

I read an article from the straits times on 4th July excellently written by Tan Min Lan, who is the head of UBS Wealth investment office.  https://www.straitstimes.com/business/economy/how-to-invest-for-a-slump-or-a-bump Unfortunately, it is for subscribers only. I shall attempt to write a synopsis of the article. Hope I interpreted it correctly;-) Here goes:

For the 2nd half of the year, there are 4 possible scenarios.

1. Stagflation scenario (20% probability, very bad outcome)

  1. Inflation
  2. Fed increase rates
  3. Economic activity stalls leading to recession
  4. Lower stock prices. Another 15% further downside is possible.
  5. Bond prices fall
  6. Repeat

This is bad.

2. Moderate recession scenario (30% probability, slightly bad outcome)

  1. All the above points 1 to 5.
  2. Corporate earnings down 15%.
  3. Household and corporate balance sheets strong
  4. Market price in future Fed rate cuts
  5. Defensive and dividend stocks outperform
  6. High quality bonds do well

3. Soft Landing scenario (40% probability, good outcome)

  1. Data shows US inflation under control. Core consumer price index down.
  2. Wages up, bankruptcy low. Corporate earnings, industrial production remain strong.
  3. Yield peak and Fed stop increasing rate
  4. No recession
  5. Stock market modest recovery. Value stocks outperform.
  6. Bond prices rise

4. Reflation scenario (10% probability, very good outcome)

  1. Rapid resolution of Ukraine war
  2. Supply chain bottlenecks that cause inflation ease
  3. Swift dissipation of China Covid19 concerns
  4. Significant rally, especially in growth stocks and riskier bonds

Its impossible to position for any single scenario. Solution is to build a robust portfolio. Keep cash, short term bonds, defensive and quality value stocks. Stay invested so as not to miss out on rallies.

Hope this summary helps you.

Personally, I am positioning myself for scenario 2 – moderate recession. I will be happy enough with scenarios 2 to 4, which is 80% probability.

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