How To Protect Your Wealth In A Global Recession

In light of the COVID-19 pandemic, it’s safe to say that a global recession tends to catch Singaporeans and the wider global community by surprise.  In just weeks, the pandemic had led Singapore into its worst recession since independence in 1965. Given the volatility of the global economy, it is imperative to recession-proof your finances. Once you have set up safeguards for your money, you will panic less when an economic storm hits as you are well-equipped to weather it.

This article will delve into what causes a recession and how you can fend against it.

Table of Contents

What is a recession?

Factors That Fuel A Recession

What Can We Do To Protect Ourselves When Times are Uncertain?

What Is A Recession?

A recession is often defined as two consecutive quarters or six months of negative Gross Domestic Product (GDP) growth. GDP is the measure of a country’s economic output, with high GDP growth rates indicating a strong economy and vice versa. Recessions are periods with low economic activity and are typically characterised by low economic output, low consumer demand and high unemployment.

Stagflation, a related concept, is a particularly painful scenario. It is when an economy experiences a recession that is coupled with high inflation. Inflation is a sustained increase in the general prices of goods and services. When prices for goods and services increase, consumers are able to buy less with a given sum of money. Hence, inflation erodes consumers’ purchasing power.

Factors That Fuel A Recession

Supply Chain Issues

The threat of recession in 2022 largely stemmed from worries about runaway inflation. During the COVID-19 pandemic, global supply chains were under great strain. China, one of the world’s largest manufacturers, took a harsh zero-Covid policy, insisting on eradicating all COVID-19 within their borders. As such, limitations on factory operations and businesses lasted well into 2022.

For example, Chengdu, a hub for manufacturing electronics and automobiles only had its lockdown measures lifted in September of 2022. Only essential sectors were allowed to operate during lockdowns. Companies had to find innovative ways to work with the restrictions if they wanted to remain in operation. Apple produces a large portion of their iPads and Macbooks in Chengdu. They utilised ‘closed loop’ working arrangements where workers live and work on-site in order to keep up with production.

The lockdowns exacerbated the already existing supply chain issues that resulted in a shortage of many components essential for the production of goods all around the globe, creating a backlog that has extended till now. This added to the upward pressure on the prices of goods and services in general.

Another factor that is greatly impacting global supply chains is the ongoing war in Ukraine. Russia and Ukraine are important suppliers of certain commodities, including but not limited to wheat, and corn. The war in the region has prevented these key commodities from being produced and exported to the rest of the world for consumption. This has placed upward pressure on global food prices as the supply of grain has been diminished.

Furthermore, the EU has placed sanctions on Russian oil and gas, banning all imports into member nations. This has increased the demand for alternative sources of oil and gas as EU nations are now forced to find alternative sources of energy to power their industries and homes. As oil is a key factor of production in almost all goods and services, this has had a widespread impact on the general price of all goods and services, once again contributing to rising inflation.

Tight Job Market

The above supply chain issues are coupled with a very tight job market. Many firms downsized during the pandemic and ramped up hiring to increase operations post-pandemic, but the job market remains volatile and uncertain. This has also placed an upward pressure on wages as companies compete with each other for the best talent. As wages is one of the biggest costs of production, this can have a significant impact on rising inflation.

Tightened Monetary Policies

As a result of all these, countries around the world have tried to tackle rising inflation by tightening their monetary policies. The US Federal Reserve has been raising interest rates at aggressive speeds. This may be inducing lower economic output as it has now become more expensive for businesses and consumers to borrow money to invest and consume goods and services. The slowing consumer demand is contributing to recession worries, particularly in economies like the US with large domestic markets.

Though Singapore does not use interest rate monetary policy to tackle inflation, we are a small and open economy. Hence, our economic health is largely dependent on the health of our major trading partners. A slowdown in economic activity in global economies would directly impact Singapore’s GDP growth.

It is interesting to note that a recession does not necessarily mean that stocks will enter a bear market. However, equity markets are often said to be a leading indicator for the economy at large. Stock prices are forward-looking as investors buy and sell stocks not based on what has happened today but instead based on what they expect will happen in the future. Hence, we often see a bottoming of equity markets months prior to a country experiencing an economic downturn.

What Can We Do To Protect Ourselves When Times are Uncertain?

There are a few courses of action that we can take to help protect ourselves and our long term goals during uncertain times.

Assess Career Security

One key worry for many in a recession is job security. The good news is that the Singapore job market has remained relatively robust. Much of the growth in employment has been attributed to high-skilled jobs in information and communications, professional services and financial services.

If seeking new employment is your short-term goal, it might be a good idea to take advantage of the current job market and make the career switch sooner rather than later. Securing a good job now means that you will have the employment income and stability to weather a recession.

It is important to consider how the interest rate hikes will affect the industry you hope to transition to. Currently there are strong labour demands for sectors such as travel and hospitality as people “revenge travel” and large-scale events are once again allowed to take place at full capacity. Other sectors such as teaching, healthcare, the public sector and cybersecurity have proven to be fairly resilient during times of recession as they are not as susceptible to business cycles.

Ultimately, job seekers need to do their due diligence about the potential sector and company. This is to ensure that they minimise the risk of finding themselves without a job in the instance that the company is forced to let go of recent hires to downsize during a recession.

Revise Your Financial Portfolio

Another major concern during recessions is how this affects our long-term wealth planning. Many of us may be invested in markets in order to grow our nest egg and are worried about how a recession may affect our financial future. When equity markets are down, it is easy to panic about how it affects our investment portfolio and in turn, our life goals. It is emotionally and psychologically difficult to see our hard-earned money diminish as markets go down.

However, it is important to keep in mind that part of being a disciplined investor is being aware of your emotions. Fear and greed are strong drivers behind an investor’s actions, and that explains why we often see people buying high at the peak of bull markets and selling low at the bottom of bear markets. It is key to not panic-sell your investments while markets are down.

Stock markets historically trend upwards. The STI bottomed at around S$2,400 in March 2020 due to the COVID-19 pandemic. It has since rebounded to S$3,292.93 in May 2024. If investors had given into their fear in March 2020 and sold, they would not only have made a loss on their investments, they would have also missed out on the potential returns after the stock market had recovered.

In the long run, markets will rebound and it is within your best interest to hold on to your current portfolio, assuming there are no changes in the fundamentals of your investments. As the Warren Buffet quote goes, time in the market beats timing the market.

For more prudent tips on how to maximise your investments, check out our other article on investing during a bear market. If you’re ready to build your investment portfolio, check out our roundup of the best online brokerages and robo-advisors in Singapore.

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