What stocks should I buy during a recession?

move your money into safe building assets, principle guaranteed. But then miss the run when the market start to be bullish again, the big R word it's been uttered so many times this year, striking fear even in the most seasoned economist. But while a recession hasn't quite yet arrived, perhaps it's not too late to look at adding some resilience instead

to your portfolio. Hi, I'm Andrea Heng. And this is the Money Talks podcast where we talk about your money and there are many wonderful things you can do with it. So previously, we asked ourselves, is it still worth putting your money in Singapore's treasury bills and savings bonds this year? Well, if you want to know the answer. Look out for that episode on Spotify or Google podcast. Just search money talks and you'll be on

the right track. But back to the dreaded R word recession, it was a buzzword at the start of the year when the world was dealing with a number of unfortunate events, staggering inflation, sky high interest rates and geopolitical conflict, all of which are sadly ongoing even today. So we're asking how can we protect ourselves from a recession if it does arrive other changes, we we need to make to our stock portfolio so that the sting will be less painful here to chart a

path for us. Is Alvin Chow CEO and founder of Doctor Wealth. Thanks for joining us on money talks. Alvin, thanks Andrea, thanks for having me. Ok. So in Singapore, we understand that a technical recession is two consecutive quarters of GDP decline. But outside this definition, what are the conditions of a recession we need to take notice of as an investor, what are the warning signs we should be looking out for?

So as you already pointed out, the Singapore economy did avoided a technical recession because the last quarter, the second quarter was actually a positive GDP growth. And I would say that looking at a bigger economy, the US economy is definitely the one that we need to watch out for because it affects the rest of the world, right? Being the biggest economy in the world. And for the US side, actually, the economy seems a

lot stronger than predicted. They have two consecutive quarters of positive GDP growth this year so far. And it seems like the US economy is absorbing the high interest rate rather well, right? To a lot of people surprise. But one of the key signs that I look out for is actually this thing called the U curve inversion. So this curve inversion is basically taking the 10 year bond you minus away the two year bond

you OK? And what does that do? So by right, a longer 10 year bond should give you a high interest rate just like if you buy a 10 year bond, you expect a high interest rate and a two year bond, right? So which means a 10 year and it's a two year Y, it should be a positive number. Oh yeah, yeah. Yeah. Yeah, that makes sense. OK. So when the U curve inverts, that means that the 10 year Y is actually lower than the two year Y, that is where you get a negative number. And that's

what the economists term as a U curve inversion. OK. And historically, this indicator, whenever the U curve inverts recession is around the corner. Oh and where are we at? If you're looking at the U curve now, it has been inverted for more than a year. OK. So one thing is that it's not immediate, it doesn't mean that all the moment that this U curve inverts the recession is going to happen tomorrow. Ok. It doesn't, there is a delay, it can be one year, two years.

So we are not exactly out of the woods yet, even though the economy looks ok now, but we wouldn't know for the second half of the year and probably first of the next year, we may see a recession. So it's still in the cuts. So it may not signal a recession immediately, but it may also not signal a recovery immediately. Yes. Ok. And there can be four signal as well. It is not 100%. But I would say that based on the historical track record of this U curve inversion, it's definitely

more than 50% accurate. Ok. So there is still a higher chance that recession may happen. Ok. May that's the key operative word. So while there may not be a recession, yet, markets have deteriorated around the world, I mean, we have seen it, it's a bloodbath in some cases and I guess that tends to mean cheaper stocks or is that too simplistic a a way to look at it. There are a lot more complication if we look into the details. So for example, definitely 2022 was a bad year for

stocks all around the world. Even in the US, it crashed, especially for tech, especially for tech. Those that were sensitive to interest rates were all getting hammered. And this year is a little bit different because the US stocks have been doing pretty well. Even the recent correction S and P 500 index is still up about 16% year to date. That's impressive. Yeah,

and NASDAQ is probably up more than 20% year to date. So, I guess a lot of people didn't expect that to happen, but we just back off a very high interest rate. It doesn't seem like in the near future, the Federal Reserve is going to cut interest rate any time soon, right? So it is surprising that the market has went up. Ok. And I think this is what most people find it difficult to understand. OK. If let's say, yeah, exactly. Right. So if the economic condition doesn't look that good, why

is the stock market going up? So historically, again, there isn't much correlation between the stock market and the economy, right? It sounds like a bit weird, right? But the correlation is almost zero really? OK. Explain this to me. And the reason is because the stock market is usually a forward looking system kind of like a future. Yeah, you will price in future expectation earlier. OK. So if you expect a recession is coming, so people

will sell stocks now there's this time lag, right? And the stock market is the indicator and if we look at the economic indicators right, it's usually lagging and delayed. For example, in August, we only get the July numbers. Yes, somebody need to compile the report and then the boss need to because we haven't implemented A I into our compilation system. And the moment they released it, there's already water under the rich it past month. Ok. But the stock market has already adjusted

by then, right? So that is why there isn't a very strong correlation. It's not that they have totally no relation there is. It's just that the stock market is front running all this information, got it. So it's anticipatory rather than reactive, you're saying? So we are still on the edge of our seat, we're still biting our nails waiting for the shoe to drop. Ok?

Would you say then that this is a favorable time to buy stocks considering they are I guess cheaper or lower priced at this time, there are definitely pockets of opportunities. Like for example, this year, we talk about the rally in us stocks. It is mainly driven by the A I side of things, right? Which means that there can be quite a lot of other sectors that are overlooked and have yet to recover. There can be some opportunities over there. And of course, investors also have to look

at what is their investment horizon. I would always advocate that if you have a long term horizon, right? It actually makes sense that every time you have some capital to invest, you should just go ahead instead of really timing the market because you really would know if it's low, you buy more, right? If it's high, you buy less, but it's that consistency that really build out the wealth. So in a downturn,

we tend to turn to safe haven assets. So your gold, silver, your precious metals, even property, sometimes its currency as well. Are these worth the buy in at this time? And what kind of returns are we looking at when the market does recover? Generally? I don't think alternative investments are better than say stocks for the long run. And some of the names that you mentioned have specific characteristics. For example, if you want to buy gold, you are

actually betting against a weakening US dollar. You are indirectly shorting the dollar, right? Because the goal is priced in dollar and gold price tends to go up if the US dollar weakens and vice versa. Right? So should I wait for the US dollar to strengthen, then I go and buy my gold. It's almost like you are betting on a forex, you are betting on us dollar strength and the US dollar strength in turn is related to whether

the Federal Reserve is hiking rates or cutting rates. So you can see it's a whole big macro mess that you need to figure out a domino thing. Exactly. So go itself doesn't have value unless people believe there is value. And historically, it has been seen as a store of value, right? Because it's seen as money. I mean, it's the thing that my mom goes to LA until US d came about and the link from go and become a fiat currency. But yet, because gold is still price in us dollar,

that relationship is still there. Right? So that's where the value in buying gold so called lies is in the UD valuation. Yes, exactly. So, the addition to buy gold or not is really relies on the Mac analysis, which I think is not easy to get, right? Even economists don't get it right. I don't, I don't think, I mean, if someone got it right, we will be set for our lives. Right. Yeah. So I would say that conventionally, I will still believe that stocks are one

of the best longer investments out there, ok? Because even historically, the returns have been better than if you just buy gold. Ok. So let's get into the nitty gritty of that. Let's first try and define what it means to be recession proof. Is there such a thing? Should we call it recession safe? Instead? I think a better word is defensive, recession, defensive, defensive stocks rather than like recession proof. So don't think of it. Don't frame it as under the recession conversation. Yeah.

And defensive doesn't mean that you cannot let the opener, Gore go, you still can. But at the end of day, you want to win the match, right? You win 21 is still nice analogy there. Nice analogy. You have to take some hits, but it doesn't mean you don't win the game, the long game. Yeah. So, for example, in the context of stocks, right, which means that if you buy defensive stocks and if the market crash happens, it doesn't mean that your stocks won't go down. Right.

It's possible that you can go down, but if your stocks go down less, maybe down 5% other people's stocks were down 30% you relatively feel good. Right. Yeah, I lost, I lost. Yeah. No, it's true though. It is true. It is true. So, I would say that having that defensive maybe is a better word than recession proof. Ok. So we will go with that term defensive stocks instead. So what are the characteristics then of stocks and investments

that are defensive? Intuitively? People will always think of defensive as sectors or businesses where people will still demand their products and services, good sort of thing. Groceries, you will still go to supermarket. In fact, you go more because restaurant will be too expensive. So you go and buy food to cook at home. That's true. So supermarket business might even go up rather than go down. So with something like your electricity companies, utilities, basically anything that people

would still use the product services during a recession. And what else outside of that segment can we look at in terms of health care? I would think so. Right. Because if you are you, are, you have to see a doctor, I think, especially in Singapore where we are driving towards healthier aging, that sort of stuff. So, there's longevity in that. Right. Or even

aging homes. Right. Because you can't stop aging because it's recession. Right. So, so there are businesses like this that are pretty immune, ok to the economic ups and downs, right. The need. It's a need and not a want. What about things like reeds? I know streets tend to be quite popular in Singapore. Weeds can be a little bit more cyclical. Of course, it depends on the type of

properties that they have. But if we generally look at it, like for example, your industrial definitely is cyclical in good times, you have more people renting spaces because they have more business, they have more staff moving around, they have more stuff to be produced, same as office. Right. Because if the times are good people expand and they need more office space and well, office spaces haven't looked good in a while. Yeah, exactly. Right. So they tend to be more cyclical and sensitive to

interest rate. So that's another side of the story. But there are health care rates. They are definitely a lot more resilient. Ok. And what about stuff like aviation? Is that something that we can look at as well? Hospitality, I think at this point in time, the tourism team is coming back and we have yet to recover. To pre-covid numbers for tourism, which means there can be be some room for growth, but they are definitely not defensive.

If recession comes, we tighten your belt or another pandemic. Yeah, you will not think of travel, you buy your food, but you may postpone your travel. Yeah. And also considering how we are living in such inflationary times, people are a bit more, I guess, thrifty when it comes to their money for luxuries like traveling. Right? So they are definitely not defensive. But if the economy continue to be good and picked up that, I believe tourism will do well.

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of what we have discussed so far. But to look at certain characteristics of the businesses, for example, we can evaluate whether a business is defensive by looking at how you perform in the past. Because if there is a recession coming, it's not going to be the 1st 10, yeah, there are many, many recession before. So we can definitely look at certain stocks by looking at their past performance during the last recession,

maybe fundamental matter here. Did they cut dividends? Did they cut revenue, did they? But profits did decline. And if the share price go down, how much do you go down relative to other stocks? So then we know that there is some proof whether this stock is indeed defensive or not. Right. And basically you're looking at the power of the rebound of that stock. So that would give us some sensing how it would

perform into the recession come. Ok. So if these stocks tend to be more resilient against recessions would be their vulnerabilities. And surely there are some weak points because they can't all be rosy all the time. Right. The bad thing about defensive store is that ok? They do relatively better during a recession during bad times, but during good times, they underperform, OK? Because they tend to be very stable, steady. Right. Right. So they just stagnate. Yeah.

So they don't grow, they don't enjoy the boom when it comes. So when the boom comes, that's where the risky stocks will outperform. And for some investors who will hold on to the defensive stocks and they will be feeling like, oh, my friend, my neighbor is making more money than me. I cannot take it anymore. I need to sell my defensive and

get into those exciting stocks. But that's where the problem happens because when you feel that assignment lightly, it might be near the end because everybody has made their money. Exactly who is going to buy from by the time you realize? Oh, you know, I could have been making more money out of this. Your time in that the market is too late. Yeah. So my guess about this problem with defensive stock is that they don't prosper

during good times and people might lose patience on them. Ok. Are there other weak points like every other business, even defensive stock? Sometimes their business can deteriorate. Their fundamentals can go poorer over time. Which means that if an investor picks some of these businesses or stocks, the constant monitoring is required right time to time may not be a daily monitoring, but every year maybe, you know, like a spring cleaning, you

need to look at your stocks. My observation over the years, looking at investors, they have a tendency to buy but they don't have a tendency to sell. Yeah, they hang on to it, like, out of some strange loyalty. And I've always been intrigued by that psychology. Do you have any observations on that one is definitely loss of version. Right. Because it's painful to sell at a loss. It's easy to sell something that has gained, like, 10% sell. Well, I feel so good. Right.

10% loss. Oh. But if I sell, it means I lose money. If I don't say I still have hope that it might come back up this kind of mentality. Do you think that kind of mentality is healthy? It definitely is not that good for investor because the fact is that no one can pick stocks 100% correct all the time. Yeah, just like how economies don't always get the forecast, right? Even Warren Buffett, but he is honest about it and he's able to sell.

So even at a big loss, right, millions of dollars, he will take that loss and he will move on. So that is a necessary part of spring cleaning, right? You need to keep your portfolio clean if I can use that energy, right? A portfolio is like a garden. Of course, you want to have as many flowers as possible, right? That resemble your gains, right? But we cannot guarantee a garden will always have flowers, there will always be weeds

and what do we do with them? We got to get rid of them, we get rid of them, right? So these weeds represent those stocks that should not be in the portfolio. But people don't, they keep it and they hope that the weeds can turn into flower one day. It's like hoarding for the wrong reason. So if we use that analogy, the, it just doesn't make sense. Yeah, you are right. So you did mention the kinds of homework we need to do before we buy into a

company stock. So company fundamentals, historical performance. What about fund baskets that comprise the so called safer, more defensive stocks are these fund baskets an option if I don't want to buy individual stocks and if yes, what are the pros and cons to them? I would definitely suggest that majority of people should buy into funds or ETF S right? Rather than picking individual one as

we have discussed is a challenging task. You need to pay attention and you need to know your stuff otherwise it's going to be difficult. So what do we need to understand overall when it comes to buying defensive stocks in terms of returns, timing, time in the market would think that a lot of defensive stocks appeals to a group of investors that tend to be more conservative. So I guess that people who are listening to this podcast have already self selected themselves and they look at

the word defensive. They come in because they are more service, those who are aggressive investor, they look at this. This episode comes up. Defensive is boring. I need to get rich quick. This is too slow for me. Yeah. Yeah. Yeah. And this defensive stores also have the connotation that it is a boomer kind of. Yes. So I will also assume that the audience who are tuning in tend to be

older and more reasonable. Actually, sometimes women too, apparently the psychology of women when they invest is that they are in it for the long term. They just want to do this and not think about it for the rest of their lives until it's time to catch out. Record shows that female investors are actually better than male. There we go. Yeah, because the male takes too much risk so they lose more. So what mistakes do you think we should avoid when

buying into the defensive stocks in the market? One of the key things that potentially may harm a defensive investor is that they think that defensive stocks are safe. But in my opinion, there are no such thing as a

safe stocks, even defensive stocks have their risk. And the worst is that you think that you buy it, you will not lose money and the share price come down and you panic and then you don't know what to do, which means it's a problem with the expectation and reality and I don't think that people should go away with the idea that defensive stores are safe, guarantee. They are definitely not as safe as your CPF. They are definitely

not as safe as your investment grade bonds. They can return you the money at the end of the maturity by your principal guarantee or fixed D or this. So it definitely will have a risk that is higher than what most people are used to putting their money in the banks and treasury bills and such. So they need to be able to understand that volatility can happen. Which means that if you buy a defensive stock, you can still go down 10% because the defensive stock is

still a stock is still a stock. So it's still affected by the general market sentiment. The stock market may go down 50% for example, maybe a defensive stock can still go down 20% and you must you ready for it. Let's talk about an exit strategy. So we've bought some defensive stocks. We have diversified our portfolio. We're looking good. What should help us decide when to exit the market? Is this when the economy improves if there are conservative investors out there who pick up these

defensive stocks, right? And we believe that it makes more sense for them to just stay a long haul and don't get tempted with during good market times where the exciting stocks are running a lot because if at that point in time you switch is going to make matter worse. So having that stability in your portfolio, that consistency maybe hold for 5, 10 years and I think that is a better way for conservative investors. I think the affordability of taking the hit is the

most important thing here. Right? Sometimes you don't know until you experience, maybe some people believe that oh I can take a 10% hit but then when the 10% draw down happens, then they panic, right? Some people think that they can take 20% but they can't. And for aggressive investors who are thinking of what professional cost sector rotation, that means you switch to defensive during a recession and you switch to growth during the growth phase.

And for that, you need to get the timing right, very accurately and not a lot of people can do it correctly. So I would say that there is definitely risk, ok? But it's not impossible. It's just very challenging. Yeah, it is challenging and I think you need to do a lot of research and really know what you're doing. And if you don't, the safe path may be the boring path, but it's not always a bad thing.

So a recession isn't always doom and gloom. Yes, it's a big R word, but it doesn't have to be a scary word that said if you harbor fears of your holdings as a recession looms completely warranted, we totally get it. It's fine to be scared. But there are some bright spots that you can consider if you find the courage to let some light in. Thanks Elvin for coming into money talks and making us a little less afraid of an impending recession. Thank you and thank you

to you, dear listener. Did you enjoy this episode of Money Talks? Well, there's more content for you to enjoy and tune into. Just follow us on Apple podcast or Spotify. Give us five stars or leave a review. The team behind Money Talks is Jacqueline Chan, Joanne Chan Tiffany Ang, Christina Robert, Jesselyn Tan and Wind and I'm Andrea Heng. Thanks for listening.