03/16/2023
‘’Preparing Your Portfolio for Different Economic Scenarios: Soft, Hard, or Perfect Landing"
The global economy is facing a key question: how should portfolios be positioned considering the different possible scenarios that may unfold? The three main possibilities are a soft landing, a hard landing, and a perfect landing. Each of these outcomes requires a different investment strategy to protect portfolios and maximize returns.
In the event of a soft landing, where the Federal Reserve and other central banks manage to contain the economy’s decline, equities are likely to rebound strongly. Investors should be moderately overweight in equities and stay in fixed income, given that rates will likely come down eventually. However, the duration of central banks’ interest rate pause is crucial, and the longer the pause, the more likely it is that rates will stay low.
In contrast, a hard landing would mean that the Fed went too hard and fast with rate increases, causing significant damage to the economy. The Fed would need to react by cutting rates quickly to avoid a double-dip recession. In this scenario, investors should be positioned in fixed income, particularly given the higher yields seen in the last year. Conservative exposures among equities, focusing on Quality and Value, are also recommended.
A perfect landing, where inflation ends without significant job losses or an excessive increase in interest rates, would result in a surge in all risk asset markets. However, this could lead to inflation rebounding faster than desired by the Fed, resulting in a premature return to higher interest rates. Investors should watch for excessive risk rallies and take profits accordingly, adding to downside hedges along the way. One way to hedge risk is with the selective use of covered calls or allocations to covered call ETFs.
Ultimately, it’s important to be aware of the different scenarios that could unfold and adapt your investment strategies accordingly.
This information has been prepared by Andrew Harroch who is an Investment Advisor for iA Private Wealth Inc. Opinions expressed in this post are those of the Investment Advisor only and do not necessarily reflect those of iA Private Wealth Inc. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.
