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)
- Fed increase rates
- Economic activity stalls leading to recession
- Lower stock prices. Another 15% further downside is possible.
- Bond prices fall
This is bad.
2. Moderate recession scenario (30% probability, slightly bad outcome)
- All the above points 1 to 5.
- Corporate earnings down 15%.
- Household and corporate balance sheets strong
- Market price in future Fed rate cuts
- Defensive and dividend stocks outperform
- High quality bonds do well
3. Soft Landing scenario (40% probability, good outcome)
- Data shows US inflation under control. Core consumer price index down.
- Wages up, bankruptcy low. Corporate earnings, industrial production remain strong.
- Yield peak and Fed stop increasing rate
- No recession
- Stock market modest recovery. Value stocks outperform.
- Bond prices rise
4. Reflation scenario (10% probability, very good outcome)
- Rapid resolution of Ukraine war
- Supply chain bottlenecks that cause inflation ease
- Swift dissipation of China Covid19 concerns
- 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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