“What should I do if there is a double-dip recession?” That is what many investors are asking since the odds of a double-dip recession have increased in recent weeks.
Make no mistake: My view hasn’t changed. I still believe the global economy is likely to muddle through with anemic growth, and the odds of a global double dip are around 40%.
Still, it’s a fair question. So if you don’t share my slightly optimistic outlook, here are three portfolio moves to consider if you do believe a double dip is on the horizon. These investment ideas assume an economic contraction and an accompanying bear market.
1. Within equities, go defensive. As I’ve mentioned before, with markets likely to remain volatile in coming months, I believe investors in general should consider adopting a defensive position in equities.
I prefer getting this defensive equity exposure through U.S. healthcare and global telecommunications. In my view, these sectors are likely to hold up best amid market volatility. In fact, U.S. healthcare has outperformed the S&P 500 Index by roughly 2% this month, while global telecom has outperformed a broad based global benchmark by around 4%.
2.) Within fixed-income, overweight investment grade. Investment grade companies are more established than their high-yield counterparts, and historically have had lower default rates during recessions.
3.) Lower commodity allocation. Commodities tend to be particularly sensitive to economic activity so investors who expect a double dip may want to consider lowering their commodity allocation. The commodities to curb back on: Those most tied to economic activity, such as industrial metals, agricultural commodities and energy.
To be sure, investors who opt for such moves should keep in mind that such a portfolio is likely to underperform if the global economy does in fact experience anemic but positive growth, as I expect. Which raises the question: What would make me change my double-dip expectations? Let’s just say that I’m closely watching events unfolding in Europe and here at home. Right now I’m most worried about events in Europe – including a disorderly Greek default or European banking crisis – and a poorly constructed budget deal in the United States.
International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments typically exhibit higher volatility. Bonds and bond funds will decrease in value as interest rates rise.
Past performance does not guarantee future results.