Investors should focus on companies that deliver consistent profits and offer a steady dividend payout to buffer against downside in a recession scenario. (Photo: Getty Images)

Inflation has remained high throughout 2022 and with the global economy likely heading into recession in 2023, investors are looking to grow and protect their hard-earned funds.

Edmund Choy, head of investments, products and solutions of CGS-CIMB Securities, believes market volatility will persist given the high inflation, geopolitical events and recession fears. He is also seeing more investors seeking professional help in managing their assets during such times.

Q: What is the outlook for bonds investment compared to stocks in 2023?

A: Yields have risen and for comparison,  the US 10-year Treasury is trading at about 3.49 per cent yield as of December 2022 compared to about 0.92 per cent in December 2020. YTD change in yield for investment grade, high yield and emerging market bonds have increased by more than 300 basis points.

In other words, bonds are looking interesting again with investment grade bonds offering about five to six per cent while high yield bonds are offering about six to seven per cent yield. If we enter a recession, bonds will also benefit as central banks cut interest rates which will be a positive for bond prices.

When it comes to stocks, investors should stay the course with quality companies with high margins and consistent profitability. We are likely to see softness in companies’ earnings in the near term given a slowing global economy but companies that exhibit both traits are likely to stand the test of time. From a defensive stance, investors can also look into sectors like consumer staples, healthcare and utilities which are less volatile.

Q: What can investors do to mitigate the impact of inflation and interest rates in the coming year?

A: Inflation will erode purchasing power in the long run and rising interest rates will cause the cost of funding to be more expensive. Investors can consider inflation-linked instruments such as Treasury Inflation-Protected Securities (TIPS) or floating-rate instruments. Investing in stocks of companies that are cash generative, pay a steady dividend, have high profit margins and can raise prices to pass on cost to consumers are also good alternatives.

Q: Should investors consider diversifying their holdings in 2023 to include alternative investment such as hedge funds and real estate, compared to traditional investment in stocks, bonds, and cash?

A: 2022 has shown us that even equities and bonds can suffer losses in the same calendar year. Hence, there is a place for alternative investments in investors’ portfolios.

The role of such investments is to generate returns that are lowly or not correlated to traditional assets classes as mentioned beforehand. In terms of risk, investors need to be aware that alternative investments tend to be less liquid, and some utilise complex strategies which can be puzzling for the man on the street.

Q:   Is Singapore still a haven for investors if the global economy enters a recession next year?

A: We believe Singapore will not be spared as the global economy enters a recession, but it will be a low beta haven as compared to the general market as the STI index has returned a positive performance of about nine per cent thus far in 2022, while global equities (MSCI World ACWI) have suffered a decline of about 15  per cent.

We would encourage investors to focus on companies that deliver consistent profits and offer a steady dividend payout to buffer against downside in a recession scenario. Our discretionary portfolio management team has formulated a customised CGS-CIMB Singapore Income (CSI) portfolio, which focuses on quality dividend paying Singapore companies that also offer considerable upside when markets recover. The minimum investment amount for this starts from SGD $200,000.

Q: How can high net worth individuals use products such as variable universal life policies as part of their legacy planning strategy?

A: Legacy planning plays an important part in ensuring one’s future generation is well taken care of upon passing on. This is an essential point of wealth planning strategy to ensure clients’ hard-earned wealth is optimally bequeathed to their loved ones or next of kin. Without proper planning, clients’ assets can be severely eroded by different countries’ jurisdictions on wealth transition, and it may take up lots of time to sort out the distribution of wealth. Variable universal life policies provide legacy planning with an underlying portfolio which with the proper asset allocation, grows in the long run to provide enhanced coverage for beneficiaries.

In partnership with CGS-CIMB.