JPMorgan’s wealth management arm says these 5 strategies can help investors navigate a recession

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  • JPMorgan Private Bank says the US is “more likely than not” to slip into recession by year-end.
  • In its 2023 midyear outlook, the wealth management firm said there are five ways investors can navigate the downturn.
  • These include investing abroad, buying bonds, and finding opportunities in industries hit by high interest rates.

Yahoo Finance – The US is facing a looming recession spawned by the Federal Reserve’s war on inflation – and there are five ways investors can navigate the approaching turbulence, according to JPMorgan Private Bank.

The wealth management arm of America’s biggest bank shared its insights in a midyear report, listing portfolio-rebuilding, overseas investments and bond allocations among strategic moves to guard against the expected economic downturn.

Recession fears have been growing ever since the US central bank started lifting benchmark borrowing costs last year at the fastest pace in decades to cool inflation. The Fed has hiked rates by a staggering 500 basis points over the past 15 months.

“A U.S. recession seems more likely than not by year-end,” JPMorgan Private Bank said, echoing the views of many economists who have said the US is in for an economic slump this year.

1. Prepare for the next bull market

US stocks are not in a bull market yet, but the worst is over for the asset class, the wealth manager said.

While that doesn’t mean it’s going to be smooth sailing for the rest of the year, investors should consider using market volatility to rebuild their portfolios, it added.

“Markets dip when investors are fearful. That is often the time to pounce,” the bank said.

“In short, you can now build the equity portfolio you want to carry into and through the next bull market,” it said, adding that semiconductor and homebuilder stocks offer potential buying opportunities.

2. Invest abroad

Reducing “home bias” is also helpful in navigating a recession, according to JPMorgan Private Bank. That means buying into stock markets outside the investor’s own country.

“Europe has outperformed the United States over the last 12 months, and although China has lagged, we see reason to believe the tide could be turning,” the bank said.

“As always, you’ll want to consider the impact of currency in your international investments. Over the coming quarters, we expect the euro to strengthen relative to the dollar, which could further boost U.S. dollar–based returns. All else equal, that should make European equities more attractive to U.S. investors,” it added.

On China, the bank said it expects a “durable recovery” following years of COVID-19 lockdowns. “Of course, investing in China comes with greater risk than investing in many developed markets. But we think certain investors could reap a higher reward for taking that risk in the second half of the year,” it said.

3. Beware of stock market concentration

“A longstanding issue for many of our clients, as we have discussed over the years, is holding a concentrated position in a single stock or security. The recent bout of stock market volatility, capped off by regional bank failures, has made this type of investment a particularly pressing risk,” JPMorgan Private Bank said.

“No matter which strategy you ultimately decide to execute, if you have a concentrated position, you should consider the consequences if—for reasons outside of your control—the asset suffers a material loss,” it added.

4. Cash versus bonds

US clients at the bank have been piling into cash investments after the Fed aggressively hiked interest rates over the past 15 months, the wealth manager said. “That made sense,” at the time, but not anymore, given cash is expected to underperform for the rest of 2023 and beyond, it said.

“Over the next 12 months, the Federal Reserve might even decide to reduce rates. This can mean our clients may need to reinvest over USD 500 billion (between 25% and 30% of their investible assets) in what we think will likely be a lower rate environment,” JPMorgan Private Bank said.

“Over the Fed’s last seven hiking cycles, core fixed income has outperformed cash by an average 14% cumulatively in the two years following the final interest rate increase, and has never underperformed. Finally, bonds once again are providing a stable source of income and the potential for portfolio protection in an economic downturn,” the wealth management firm said.

5. Risks and opportunities in banking and commercial real estate

According to the bank, the US banking and commercial real-estate sectors could threaten the overall health of the economy.

The two industries have already faced damage from the Fed’s interest rate hikes, including the collapse of several major banks, and several billions worth of distressed assets in the commercial property sector.

But those sectors aren’t without opportunity if investors know where to look, according to JPMorgan Private Bank.

“Invariably, risks can bring opportunities—if you know where to look. We think investors can uncover opportunities in two specific arenas: They can extend credit to high-quality borrowers who would traditionally borrow from a bank, and they can snap up distressed assets at a fraction of their intrinsic value,” the bank said.

“On balance, then, as we assess the threats from the turmoil in U.S. regional banking and commercial real estate, we can’t and shouldn’t ignore the pain. But there could be considerable promise, nonetheless,” it added.

Image: Yahoo Finance (Photo by Mario Tama/Getty Images)

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Edmund Shing, PhD

Global Chief Investment Officer
BNP Paribas Wealth Management

Edmund has over 29 years of experience in financial markets in a wide variety of positions, ranging from proprietary trading to portfolio manager in a number of financial institutions in London and Paris.  He previously held the role of Global Head of Equity and Derivative Strategy at BNP Paribas in London from 2015 to 2020, and has been Chief Investment Officer at BNP Paribas Wealth Management since November 2020.

Edmund is responsible for piloting our investment strategy and will continues to rollout out recommendations and themes with actionable advice that brings our expertise to our clients and support to our client-facing teams.  In this time of change, his expertise in following and anticipating markets is a true value added for both our customers and those at Wealth Management who serve them.

Edmund has a PhD in Cognitive and Computing Science from the University of Birmingham in the United Kingdom, and has done advanced studies in Knowledge-Based Systems and in Experimental Psychology.  He is an EFFAS-certified financial analyst. He has also authored the book “The Idle Investor” published by Harriman House in 2015, proposing 3 simple investment strategies that take only a few minutes to execute per month.

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