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Rising inflation and risk of recession

While the various stimulus packages helped the global economy through the short-term challenges of COVID-19, they were always going to cause difficulties in the medium term. Inflation has risen and a recession looks likely, so how can investors respond effectively?

The global economic system appeared to have coped with the COVID-19 pandemic and related lockdowns. Individual politicians took different approaches to their economies, each with different micro-level impacts, and there were winners and losers throughout the process, but overall, the wind continued to fill the economic sails and countries continued to move forward.

Inflation risk

In the short term, it was economically and politically expedient to keep the economy buoyant, but in the medium term it carried significant inflationary risks. The complications caused by the events in Ukraine have added pressure to an already fragile structure, and as the last quarter of 2022 approaches, many countries are facing inflation levels not seen since the 1990s.

There is a very real threat of a global recession in 2023. Traditionally, policymakers have used interest rates to reduce inflation by raising them to make it more attractive to keep money in the bank or invest in government bonds rather than continue spending.

Interest rates have been at historically low levels for most of the decade, so there is plenty of room for them to rise, and this is likely to have a significant impact on investment decisions.

Why is inflation important?

The goal of investing is either to create or preserve wealth, which means that during periods of high inflation, investors need to make sure their portfolios work harder to stop the value falling. The problem is that inflation affects different asset classes differently.

Inflation has been very tightly controlled in developed markets over the past few decades, so the markets have relatively little experience of dealing with it. Understanding how individual asset classes have responded to periods of high inflation can provide a good gauge of what could happen in what will be a very challenging couple of years.

How should investors react?

At the same time, even if it doesn’t turn into a full-blown recession, smaller companies struggle with cash flow during a downturn, no matter how innovative their ideas and flexible setups. However, in many ways, it is during difficult times that ideas are tested, teams are built, and companies are created that win the world.

This makes investing in challenging times even more important and can make the potential returns even more exciting.

Make losses more manageable

Most investors are experienced with 60/40 (stocks/bonds) portfolios, but in 2022 this asset allocation is experiencing problems. As of August 2022, the balanced portfolio is down nearly -15 percent in dollar terms. When markets get difficult, it’s no secret that diversifying your investment portfolio tends to help spread risk and potentially make losses more manageable.

Asset managers like the Petiole Asset Management team typically have access to and years of experience across a wide range of asset classes in the private markets, which can give them greater insight into potential investment opportunities to improve the risk and return profile of their entire portfolio. .

Change, flexibility and transparency

Clearly, the investment space has changed significantly over the last 15 years with new digital tools providing a level of transparency and reporting that was unimaginable a generation ago. These tools allow investors of all sizes to be far more resourceful and flexible in their approach to their private asset portfolios.

In many ways, investing is like sailing: with a little practice, most people can happily take a boat around a quiet bay on a clear day with a light breeze and get something positive out of it. However, when conditions change, the sky darkens and the wind picks up, the inexperienced can quickly find themselves in trouble.

And it doesn’t take years of experience to realize that access to the financial markets is likely to be very difficult for at least the next year.

https://www.retailnews.asia/rising-inflation-and-the-risk-of-recession/?utm_source=rss&utm_medium=rss&utm_campaign=rising-inflation-and-the-risk-of-recession Rising inflation and risk of recession

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