One of the key issues facing investors is the possibility of a global recession in 2023. 

While the jury is still out on whether Australia will avoid a technical recession, the Reserve Bank of Australia anticipates a significant slowdown in economic growth next year. 

Mike Coop, the chief investment officer for Morningstar Investment Management for Europe, the Middle-East & Africa, agrees that "as investors, the reality is that a recession appears the most likely scenario for many countries".

However, it is impossible to know both the severity and duration of any potential recession.

Morningstar’s head of US economic research, Preston Caldwell, says investors need to look beyond 2023, with growth expected to "accelerate again in 2024 as the Federal Reserve lifts off the brakes."

What should I do now?

The fact is, every investor will endure multiple recessions in their lifetimes, Coop says. The key is how we deal with them.

He offers three recommendations for investors to deal with a recession.

1. Revisit your goals and objectives

It is important to make sure your goals and objectives remain relevant, Coop says.

"Given the changes we’ve experienced in recent years, it is not unusual for these goals to have shifted. This includes confirming the timeframe for reaching them," he says.

"Whatever the outcome of this review, there are big advantages of measuring success in terms of progress to reaching your goals, rather than beating the market."

2. Stay the course with a well-diversified portfolio 

Coop recommends erring on the side of caution every time there is a period of uncertainty.

"Check you are taking the right amount of risk to reach your goals – one that you can live with in bad times and one that will be enough to at least keep pace with inflation."

He says this can be achieved simply by having a diversified portfolio, including assets that behave differently to others when there is recession – such as equities and high-quality bonds.

3. Use valuation to get the odds in your favor

Coops says it's "desirable to favour assets that already reflect pessimism about the future" as they are less prone to falling than assets that are highly popular, have gone up a lot and are priced for the best possible scenario – and therefore, not very likely to occur.

"Within equities, we find it imperative to balance exposure between the most attractively valued assets along with stabilisers such as dominant companies with little debt and goods and services that are perennially in demand. Examples can often be found in areas like healthcare, utilities and consumer staples".

Investing in a recession

Asking if there will be a recession – and how to avoid it – misses the point, Coop says.

In times of uncertainty, Coop says it's healthy to center back on the truths of investing during a recession, which he defines as:

  • To get investment returns you need you to take risk—cash is unlikely to help you beat inflation and grow wealth over time.
  • Recessions are common (occurring every seven-to-10 years on average), temporary (lasting several years) and eventually followed by economic recovery.
  • Stocks tend to front-run the economy, not the other way around. They will also front-run the economy before the recovery happens. This makes market speculation incredibly difficult as you need to get two decisions right (exit point and re-entry point) amid heightened uncertainty. Very few, if any, have this skill.
  • Stocks do have a track record of falling before and during recessions because company profits fall and bankruptcies rise. However, they have always recovered lost ground in the years that follow.
  • Bonds have a good track record because inflation and interest rates tend to fall. Today, rates and yields are high enough for bonds to provide this offset.
  • The main way you fall short of your financial goals is a permanent loss of capital where you never recoup the losses. These can occur in recessions (such as a low-quality investment that goes bankrupt), so care needs to be taken.
  • Three killers that trigger permanent losses are:
    1) speculative investments with no basis for their valuation,
    2) assets with too much debt, and
    3) selling out at the bottom because of behavioural biases.
  • Buying shares when they are cheap tends to lead to higher-than-usual returns because markets price in bad scenarios and there is upside if conditions improve.