Investing in 2H22 – Recession, rising prices, & restructuring
07 Jul 2022
- Real-time economic data suggests that the US is likely already in a technical recession. However, Singapore might be able to avoid a recession as its re-opening helps to support consumer spending.
- With falling commodity prices, inflation expectations have come off in the last few weeks. This might lead the US Fed to be less aggressive on its interest rate hikes.
- Coming out of the pandemic into a slowing economy, companies might accelerate on their restructuring plans. We’ll also be looking out for signs of further regulatory easing in China.
- No one knows how deep or how long the economic slowdown might be, so the best strategy is to always stay prudent.
And just like that, we’ve seen the first half of 2022 gone by.
Our investment portfolios have survived the Ukraine Crisis, aggressive interest rate hikes by the US Federal Reserve, and soaring inflation.
Looking back, the S&P 500 saw a 20.6% loss in the first half of 2022, bringing the index into bear market territory.
Closer to home, the STI performed slightly better and was flat over the same period.
Admittedly, it is hard to navigate through all of these. After all, even Mark Zuckerberg has said that “this might be one of the worst downturns we’ve seen in recent history.”
So what should we focus on as we think about positioning our portfolios for the rest of the year?
Recession, rising prices & restructuring
#1 – Recession
It’s hard to think about investing these days without thinking about whether we are going to see a recession.
Hence, it is not too much of a surprise that Google Searches for “recession” has surged in recent months.
Elon Musk has said a “recession is inevitable”. Cathie Woods has said that the US is already in a recession.
Looking at the economic data, the US appears to be already in a technical recession (defined as two consecutive quarters of GDP decline).
Based on the latest estimates by the US Atlanta Fed using the latest economic data (as of 1 July), the US economy likely shrank by 2.1% in 2Q22. This follows a contraction of 1.4% in 1Q22, which would put the US in a technical recession.
Yet, Singapore’s Finance Minister Lawrence Wong recently said in parliament that the government does not expect a “recession or stagflation scenario next year”.
Does this mean that Singapore will be more insulated from the global slowdown we are seeing?
One of the factors that is helping to support the economy is the re-opening. Amidst all the doom and gloom, let’s not forget that this time last year, we were still having a lot of Covid-related restrictions. And traveling overseas was something that is almost unimaginable.
Here, economic data is still positive with a strong recovery in exports and consumer spending. While major economies such as US and China are facing a slowdown, Singapore has been helped by exports to neighbouring countries such as Malaysia and Indonesia which are also re-opening. The influx of tourists has also helped to boost retail sales, which rose by 17.8% YoY in May.
#2 – Rising prices (or inflation)
Apart from recession, the other hot topic that we are all talking about is definitely inflation.
After all, consumer prices in Singapore rose by 5.6% YoY in May, the highest level in more than a decade.
So the debate goes on – have we seen the peak of inflation, or is the worst yet to come? (And will we finally be able to import whole chickens from Malaysia again)?
The encouraging sign in recent months is that commodity prices have started to fall. From oil to copper and nickel, prices have declined after peaking some time last month.
With growing recessionary fears and fall in commodity prices, consumers’ expectations on long-term inflation have also began to fall.
This is important as a moderation in price expectations prevents inflation from being structural in nature.
Think of it as higher commodity prices lead consumers to expect higher inflation in the long term. These consumers then ask for higher wage increases. Companies will have to raise prices to reflect the higher wages that they are paying, and the inflation spiral continues.
As inflation expectations are moderating, the other positive sign is that investors are expecting the Fed to be less aggressive in raising interest rates.
In fact, some are expecting the Fed to be cutting rates by the middle of next year!
Based on current expectations, most investors are expecting the Fed target rate to be at 3.25-3.50% by end-2022. This will mean another 1.75% of interest rate increases for the rest of this year.
However, if we were to look further out to June 2023, most investors are expecting the Fed target rate to be lower at 3.0-3.25%!
This may mean that we could see the peak of this interest rate cycle by the end of this year, and interest rates will start coming down again by next year.
#3 – Restructuring
As companies emerge from the pandemic, there may be a greater impetus to think about structural shifts and how best to positions for such changes.
This has led to more corporate action, including strategic reviews, privatisations, as well as mergers and acquisitions.
So far this year, we have already seen significant news about restructuring
- Proposed merger between Keppel Offshore & Marine and Sembcorp Marine
- Thai Beverage’s potential listing of its beer business
- Singtel reportedly looking at listing its Australian business
- Frasers Property privatization offer of Frasers Hospitality Trust
Such moves may be accelerated if we were to see an economic slowdown, as companies will have to find ways to boost their returns.
Taking a step out of Singapore, we will also be looking out for any regulatory changes coming out of China.
Amidst the correction in global markets in recent months, one bright spot has been the Chinese market, where we have seen stimulus measures and interest rate cuts to support the economy, as well as a reversal of the clampdown on tech companies.
This improvement in sentiment is reflected in the share price of Nio, a leading electric vehicle maker in China. Its share price has close to doubled to above US$22 from a 52 week low of US$11.67 just a few months ago!
What would Beansprout do?
- Still too early to be gung-ho. Recession, rising prices and restructuring – these are what investors have to navigate through in the markets today. Just as there are some positive signs on inflation starting to ease, recession concerns are rising sharply. No one knows how deep or how long the economic slowdown might be, so the best strategy is to always stay prudent.
- Consider safer investments to ride out uncertainty. If you are concerned about inflation and are looking for a stable investment, it might be worth taking a look at the Singapore Savings Bonds (SSBs) or Singapore Government Securities (SGS) bonds. With the yields on these government-backed bonds at multi-year highs, I’ll feel better putting my spare cash in them over letting it sit in a bank account or even a fixed deposit account.