Financial planning more important than ever as recession risks rise

High-net-worth individuals can leverage different instruments to plan their financials with the help of wealth advisers

Even as central banks engage in monetary tightening to rein in inflation rates that have reached multi-decade highs, their economies run enhanced risks of falling into recession amid weakening geopolitical and macroeconomic fundamentals.

And as economic growth weakens, high-net-worth (HNW) individuals would do well to plan ahead and readjust their strategies.

Parts of corporate America are already feeling the pain as the US Federal Reserve continues to raise rates. Alphabet, Google's parent company, posted third-quarter earnings per share of US$1.06, short of Wall Street's estimates of US$1.25. The company attributed this to weaker advertisement spending from sectors such as insurance, loans, mortgage and cryptocurrencies.

Chipmaker Intel also said in its third-quarter earnings that it would be cutting jobs after lowering its full-year profit and revenue forecasts, despite stronger-than-expected performance from its personal computers segment.

Inflation, on the other hand, remains high. The US core Personal Consumption Expenditures Index, which is the Fed's preferred measure of inflation, climbed 5.1 per cent on an annual basis in September this year, far higher than the 2 per cent rate it hopes to achieve.

The Fed responded with another 75 basis point interest rate hike at the last Federal Open Market Committee meeting on Nov 2. Fed Chair Jerome Powell signalled a potential slowdown in rate hikes, noting that the time to reassess the pace of increases "is coming".

DBS chief investment officer Hou Wey Fook said that the US Federal Reserve runs the risk of derailing the robust post-pandemic recovery, in its zeal to play catch-up and control inflation through aggressive monetary tightening.

"Despite an increasingly hawkish Fed and backward-looking economic data suggesting the persistence of heightened inflation, we believe peak inflation is round the corner," he said.

Based on his team's economic forecast, the Fed funds rate is expected to peak at 5 per cent by the first quarter of next year, where it is likely to remain for the rest of the year.

"In any case, should a recession eventually transpire, it will likely be mild as there is the absence of systemic imbalances and the labour market remains strong," Hou added.

Headwinds remain in other parts of the world. For instance, European nations are still grappling with higher energy prices fuelled by the Russia-Ukraine crisis.

Oil and gas prices have temporarily fallen, as Europe has managed to stock its storage facilities and the continent expects to see an uncharacteristically warm winter, but its dependence on Russia for its energy needs could continue to be a sore spot next year.

In Asia, uncertainty over China's Covid-19 policies remain a drag on consumer and business confidence as well as growth prospects.

"The untimely convergence of headwinds suggest that economic moderation is on the cards," Hou said.

Still, he believes that there are investment opportunities, as long as investors remain cognisant of the macroeconomic factors that continue to shape the landscape.

"In general, investors are aware that interest rates can have a big impact on their investments, which means they're likely to adjust the strategies they employ," said Hou. He advocates a "barbell" approach to an investor's core portfolio.

The core portfolio should consist of passive investment instruments like exchange-traded funds and unit trusts that track equity indices, while the barbell approach involves investing in both income-generating assets as well as growth equities.

"This allows investors to take advantage of capturing strong gains in sectors that are expected to outperform the market in the long-run, while balancing that risk out with dividend-yielding stocks or high-quality bonds," Hou said.

Furthermore, he recommends that investors hold high-quality bonds and stocks in a rising interest rate environment, which can be done by making small tweaks and additions to their portfolios.

For the income-generating portion of this core portfolio, Hou believes that investors can apply dollar-cost averaging to add A/BBB-rated bonds that are currently trading north of 5 per cent, as these represent a stable source of income.

Dollar-cost averaging refers to investing a fixed amount of money into a particular investment at regular intervals, to mitigate against timing risk.

"Following sell-offs, dividend equities like Singapore and China banks, Singapore real estate investment trusts (Reits) and global integrated oil companies continued to be favoured," he added.

Hou also noted that there has been a rotational shift towards cyclical equities within the US market, and that this shift should continue if bond yields reach a peak in the next few quarters.

"Beyond the near-term market volatility, we see value emerging with cyclicals contracting by more than 40 per cent since end-2020, and the risk-reward is currently attractive," he said.

As for secular growth equities, he likes I.D.E.A. companies, or innovators, disruptors, enablers and adapters, which currently offer valuation buffers. Such companies tend to challenge the status quo in their respective industries and embrace digital change to transform and thrive.

"Companies in the technology sector tend to hold on to greater amounts of profits as retained earnings to reinvest in growth opportunities, rather than paying them out in the form of dividends," Hou said.

In periods of rising interest rates, he noted that the tech sector has also experienced average gains that outperformed the S&P 500 index. In the last quarter of this year, he believes that investors can continue to maintain exposure to US tech companies to ride the tailwinds of "toppish" bond yields.

Despite these investment ideas, investors may still be squeamish about entering the markets when sentiment is so weak.

Keep calm and plan ahead

Head of DBS Treasures Steven Ong noted that during such a period, it is natural to feel concerned about the performance of one's investments and turn to panic selling in haste.

Still, he advocates taking a long-term view to investment portfolio construction.

"This is because during such periods, you may be required to have longer holding power, since no one knows how much lower the market will go, or when it will start to recover," Ong said, adding that time horizon can affect the potential returns of one's investments as well as the types of investments that one can consider.

He noted that the idea behind thinking long is that as the economy tends to grow in the long-run, companies profit in tandem.

However, while long-term investors who put money to work during a recession have done well, trying to time the market is "almost always a losing battle", Ong said.

"There's no crystal ball that can tell you when the market will bottom," he added.

For HNW individuals seeking both investment returns and protection coverage, Ong suggests that they consider insurance products such as endowments, whole-life plans and investment-linked plans (ILPs).

Firstly, endowment policies provide some protection coverage while also growing money in the insurer's participating fund.

Such a plan could help to cover shorter-term needs such as saving for wedding expenses as well as longer-term needs such as a child's tertiary education and retirement. This is because such plans can come with maturity periods as short as two years, to up to 30 years.

Ong noted that those insured under such plans would then be able to receive a guaranteed payout plus bonuses, upon plan maturity, although the bonuses are not guaranteed, and dependent on the investment returns of the participating fund. Individuals may also choose plans that make regular payouts for a pre-defined payout.

Secondly, whole-life plans offer monthly or yearly payouts based on your expected needs and lifestyle during retirement.

Ong said: "Such plans are particularly useful during the first 15 to 20 years of retirement, when you may incur higher expenses due to the desire to travel, pursue hobbies or even attain higher education while you are still physically able and mentally agile."

He added that some retirement income plans allow customers to adjust their plans whenever they want, to help them better manage unforeseen changes in life.

"Customers can also top up their premium any time after the first year, up until five years before their selected retirement age. Customers can update their income payout period, retirement income rate and/or defer retirement age during the policy term," he said.

Lastly, ILPs can be useful in providing insurance coverage as well as investment returns. Individuals can choose from different ILP sub-funds which cater to different investment objectives, risk profiles and time horizons.

"Because ILPs buy unit trusts which deal directly with the market, there is potential to make higher returns than other life insurance policies if the funds do well...

"This is also dependent on the value of the funds when you choose to end your policy and redeem your investments," Ong said.

He added that for individuals engaging in such a plan, increasing their insurance coverage would come down to selling more units to buy more insurance, since the units fund the insurance coverage. While this reduces their investment, it also increases their coverage without them having to pay higher premiums.

Still, he noted that over time, it is possible that the units bought with the initial premiums may no longer cover the insurance cost as the policyholder gets older.

"You may then end up with little or none put into investments. To maintain the investments, some then resort to reducing insurance coverage," Ong said.

It is worth noting that in ILPs, the policyholder bears the investment risk. Since ILPs offer direct participation through their unit trusts, they do not guarantee their returns, and how much policyholders end up with after surrendering their policy depends on what the units are worth at that time.

This is unlike participating whole-life plans, which use most of a policyholder's premiums for insurance coverage and some parts for investments.

For HNW individuals who may not be familiar with how to incorporate different investment ideas and insurance plans, Ong said that wealth advisers would be able to offer their insights.

"In areas where clients might not be experienced, advice from wealth advisers might aid in safeguarding their assets and to navigate safely out of the situation...

"Another benefit of this is the ability for clients to build trust and rapport with their wealth advisers, which is essential in any long-term relationship," he said.



BT is now on Telegram!

For daily updates on weekdays and specially selected content for the weekend. Subscribe to