Countries like the U.S. and U.K. are grappling with inflation that has risen to multi-year highs as the Ukraine war has caused energy prices to spike and food prices to rise.
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Talk of a recession is heating up, with Wall Street veterans flagging the rising risks of a downturn — and offering advice on how to invest during this cycle.
Investment bank Morgan Stanley said that while a recession isn’t its base case, it is its bear case because the risk of one has “gone up materially.”
“Needless to say there are numerous shocks hitting the economy right now that could tip us over into a recession at some point in the next 12 months,” said the investment bank in a May report. It cited factors such as an escalation of the Russia-Ukraine war that may push oil prices to $150, the extremely strong dollar, and crushing cost pressures on companies.
Wall Street veteran Ed Yardeni, who had said in April there was a 30% chance of a recession, last week raised that figure to 40%, while Citi CEO Jane Fraser told CNBC she was convinced that Europe is headed for a recession.
The war in Ukraine has caused energy prices to spike and food prices to rise. The U.S. and U.K. — and other countries around the world — are grappling with inflation that has risen to multi-year highs.
Major stock indexes have posted steep declines since peaking late in 2021 and early this year, with the Nasdaq losing around 23% since the beginning of 2022. The S&P 500 has dropped about 13% in the same period.
Here’s how antsy investors can ride out persistent turbulence in the stock market, according to the experts.
1. Buy these three sectors
As volatility is set to stick around, Morgan Stanley recommended defensive sectors in a May 16 report on its U.S. market outlook. Those include health care, utilities and real estate.
“With the exception of Energy, all of the top performing sectors have come from the defensive end of the spectrum,” Morgan Stanley wrote. “We do not believe defensives will have a great run of absolute performance but they should offer some relative protection as our call for lower earnings and multiples would hit cyclicals harder.”
Defensive stocks provide stable dividends and earnings regardless of the state of the overall stock market, while cyclicals are stocks that can be affected by the cycle of the economy.
This is what Morgan Stanley says about the three defensive sectors:
- Health care: The sector is trading at a discount to the overall market, unlike most other defensive sectors, according to Morgan Stanley. The bank prefers large-cap stocks in pharmaceuticals and biotech, adding that they are trading at an attractive price and offers relatively attractive dividend yields.
- Real estate: The sector gained 42% last year, and has outperformed the broader U.S. market by 16%, said Morgan Stanley. The bank likes this sector for its earnings…
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