Investment

How to protect your investment portfolio

 bear market  A trader reacts in front of the German share price index DAX board at the Frankfurt stock exchange, January 15, 2015. Global markets were thrown into turmoil on Thursday as a shock move by Switzerland to abandon its three-year cap on the franc sent the currency soaring and Europe's shares and bond yields tumbling.    REUTERS/Kai Pfaffenbach (GERMANY  - Tags: BUSINESS TPX IMAGES OF THE DAY)

Bear market: Amidst the market turbulence, investors are wondering whether a recession is looming. Photo: Kai Pfaffenbach/Reuters

The current market downturn has pummelled shares, with lacklustre performance from asset managers only compounding investor fears.

Markets have been shaken by war in Ukraine, the impact of China’s zero COVID policy on the world economy, and the threat of global recession.

Stagflation, reflation, soft landing or slump are all possible turns for the markets to take in the second half of 2022.

Here are some views from the experts at UBS Wealth Management on how to protect your investment in each scenario.

Stagflation

The current market narrative expects a period of stagflation — weak growth and rapidly rising prices — in the months ahead.

To manage portfolio risks in the event of the “stagflation” narrative continuing to drive markets, investors should build and manage a Liquidity portfolio, sized to meet three to five years of cash flow needs. This will likely consist of a mix of cash, cash alternatives, and short-duration bonds.

Read more: What is stagflation and can it lead to a recession?

Investors should also consider an adequate allocation to hedge funds, which have the potential to deliver performance even if both bonds and equities are falling. Some hedge fund strategies — especially macro strategies — are designed to perform well in recessionary scenarios.

Slump

Stock markets have been turbulent since the start of the year and there are signs that a bear market might be coming.

To build up defences against a potential “slump,” in which lower corporate profit expectations drive weakness in stocks, UBS WM said investors should add exposure to quality-income stocks, the healthcare sector, resilient credit, and the Swiss franc (CHF=X).

Capital-protected strategies may also allow investors to use volatility to work in their favour and mitigate potential downside risks. High volatility also presents opportunities to generate yield in FX, commodity, and equity markets.

Watch: Yahoo! Finance Talking money with Warren Buffet

Soft landing

Invest in value, including energy stocks and UK equities. The experts think value would perform particularly well in the “soft landing” scenario as increased confidence that corporate earnings can stay resilient benefits some of value’s cyclical sectors, such as financials and energy. Inflation above 3% also supports the style. Stocks linked to the “era of security” are also a good idea, according to the experts.

As governments and businesses aim to bolster energy, data, and food security, this will spur demand for carbon-zero, cybersecurity, and agricultural yield solutions, according to UBS WM.

Read more: Crypto ‘structural flaws’ make it unfit as money, warns world banking association

High exposure to both commodity-linked and value sectors has benefited the UK equity market in recent months.

Year-to-date, the MSCI UK index is up 1% versus the MSCI ACWI down 22%. Yet the index is still trading at just 11.2x 12-month-trailing P/E, a discount of 30% against MSCI ACWI. The UK has historically traded on a 15% average discount. The current 12-month forward P/E, meanwhile, stands at just 10x, and the market offers a dividend yield of 4%.

Reflation

Consider using the sell-off to build longer-term positions. A quicker-than-expected alleviation of market concerns about inflation could trigger a rally in certain growth stocks, even if this remains a low-probability scenario at this stage.

Meanwhile, investing in private equity following public market declines has historically been associated with strong returns.

Read more: Alternative investments: How to invest in tangible assets

UBS WM sees particular opportunity for the long term in growth stocks trading below long-term average valuations, in automation and robotics, and in China.

Investing in private equity following public market declines has historically been associated with strong returns. The average annual return on global growth buyout funds launched a year after a peak in the MSCI All Country World Index has been 18.6%, according to Cambridge Associates’ data since 1995,” UBS WM said in a report.

Watch: MoneyWatch: What is “stagflation?”

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