Global recession risks rise – are you prepared?

With a global recession looking increasingly likely this year, investors should review their portfolios sooner rather than later to mitigate avoidable risks.

The head of the International Monetary Fund (IMF) on Tuesday said the organisation is set to downgrade its global economic growth forecast due to the impact of Russia’s invasion of Ukraine.

Before the Russia-Ukraine war began and sanctions were imposed in response, raw materials, energy, manufacturing parts and consumer goods were all surging at the quickest pace since the 1980s due to pandemic-triggered supply chain issues.

But this has since been exacerbated since the invasion. International supplies are now at breaking point and this in turn negatively impacts global production and, therefore, output, investment and jobs. And as businesses pass on the costs to consumers, households inevitably cut back on other expenditure.

Against this backdrop, developed economies are having to accept that they are facing the increasing likelihood of a recession in 2022 because of these ongoing supply chain disruptions and red-hot inflation not seen since the 1970s.

In addition, developing countries can be expected to be hit hard by the fallout of higher energy and food prices, combined with tighter financial conditions triggered by advanced countries raising interest rates in a bid to control inflation.

The threat of a recession is highest in Europe due to the economic links of the region with Russia and Ukraine and its reliance upon Russian energy which will intensify the challenges.

Geopolitics can significantly impact investment returns as it creates uncertainty. So how might investors respond?

Geopolitical risks typically tend to prompt investors to move away from riskier assets and towards perceived safe assets. But this also needs to be considered carefully.

For instance, cash is often considered a ‘safe haven’ during periods of volatility but it’s going to be negatively impacted by soaring inflation. Rampant inflation means excess cash in your bank accounts will lead to losses in real value. Hardly a safe haven then for those wanting to build long-term wealth.

As the risks of a global recession ramp up, there remains one clear way for investors to maximise returns relative to risk: the time-honoured practice of portfolio diversification.

A considered mix of asset classes, sectors, regions and currencies offers protection from market shocks.

A good fund manager will help investors capitalise on the opportunities that volatility brings and sidestep potential risks as and when they are presented.

An unwelcome combination of supply-side issues, soaring prices, climbing business and consumer uncertainty, slower growth and employment mean global recession risks are rising.

Investors would do well to review their portfolios now to ensure they are best-positioned.

Nigel Green is the CEO of the deVere Group

BUSINESS REPORT