The Potential for Recession and the Importance of Asset Diversification

• Experts and economists predict that a recession is likely for the end of 2022 or the beginning quarter of 2023.
• Asset diversification is one way of hedging against a recession, and this can be done in a number of ways.
• One of these means is offshore banking and investing which Luigi Wewege gives his experienced opinion on.

The recent increase in inflation also increases the probability of a recession according to multiple economic forecasts which have recently been published. There is the potential for this to cause fewer available jobs, more frequent layoffs, and higher interest rates. In June the median probability of a recession was 30%. Since then, it has been raised to 47.5% over the next twelve months. This is according to a survey conducted by Bloomberg which was recently completed. Additionally, a recession is officially declared by the National Bureau of Economic Research which provides the following definition: "a significant decline in economic activity that is spread across the economy and that lasts more than a few months."

The Potential for Recession

One of the major factors that is making a recession look likely is inflation which is continuing to increase. Inflation has hit 9.1% year-over-year which is the highest it has been since 1981. This is according to the latest consumer price index report . Many high-level banks predicted an economic slowdown in 2023 but the recent forecasts now bring this estimate forward to 2022 or early 2023. Bank of America followed in investment bank Nomura's footsteps by predicting a mild recession in the last months of 2022. This new outlook represents a revision of an earlier forecast which did not predict a recession, only slow growth economically.

In a similar fashion, Wells Fargo has changed its prediction to mild recession from soft landing for the first quarter of 2023. One of the key factors in this revision is the inflation data from June and July, this includes the CPI report. This is according to Jay Bryson, the Chief Economist at Wells Fargo. He has stated that inflation, "is becoming more entrenched and more widespread" and that for consumers, "it's eroding real disposable income." A decrease in consumer spending is another sign which signals an incoming recession. It is predicted that by September there will be a strong decline in consumer spending due to people being forced to go into their savings to be able to handle the rising costs of both goods and services. This can be seen in recent data which shows that consumers have saved less and accumulated more credit card debt which is unsustainable in the long term.

Interest rate hikes accompany persistent inflation, and the Federal Reserve has recently announced another 0.75% increase in the interest rate. Interest rate increases can cause a decrease in inflation by increasing the cost of borrowing money. However, this also has the potential to slow down economic growth by discouraging consumers from purchasing goods and services. Interest rate increases ultimately mean higher costs for consumers as debt of all kinds can potentially become more expensive. The importance of controlling inflation is emphasized by the fact that wage growth is outpaced by the rate of inflation as of now.

The Importance of Diversification

With the likely recession on the horizon, it is important to diversify assets to ensure a mitigation of risk. Diversification is a financial strategy to reduce risk by making investments across multiple asset classes, industries, and other categories. This strategy aims to reduce risk and minimize losses by intelligently investing in different assets that would not react in the same way to the same event. It is agreed on by most investment professionals that diversification is the most important factor in the process of achieving long-term financial goals while at the same time minimizing risk. However, diversification does not guarantee against loss, it just attempts to make losses less likely in the long term. This is important because it reduces risk and ensures that a business failing will not wipe out an entire portfolio.

An asset portfolio that is diversified would include different asset classes like bonds, stocks, and other investments. Additionally, these avenues of diversification would be explored horizontally as well by purchasing shares in different companies and industries. For example, a diversified portfolio might include stocks in industries such as technology, retail, logistics as well as both public and private bonds. Even further diversification could include cash or an offshore bank account . When an individual diversifies their investments, they reduce the amount of risk which their portfolio experiences so that they can maximize their returns. This will not prevent systemic risk, but it can prevent unsystematic risks such as business or financial liabilities.

Luigi Wewege on Portfolio Diversification

Luigi Wewege is the President of Caye International Bank, headquartered in Belize, Central America. He has also co-authored economic research which has been presented before Congress in the United States. He has an Italian MBA from MIB Trieste School of Management with a major in international business. He is also an expert in the diversification of assets and investment portfolios. He has clients from all over the world including New Zealand, South Africa, Chile, Singapore, and the USA. Of late his clients in Australasia have been very eager to invest in Belize.

Wewege has recently spoken about the investor friendly climate which Belize offers particularly as a means of diversification to hedge against recession. He has stated that, "Belize offers a certain degree of insulation from global economic upheavals. With the economic foundation grounded in tourism and agriculture, the country can minimize the impact of many types of economic difficulties abroad. Much of our resources are sustainable, given the land, the ocean, and the reefs. That establishes stability in the present, while positioning Belize to aid in the recovery process in the future."

When Wewege was asked why Belize consistently ranks as one of the top 10 locations for offshore accounts, he had this to say, "Comparing and contrasting some of the differences with other options yields three reasons that affect where people choose to bank. One has to do with the tax structure in Belize. Simply put, there's a zero-tax rate on deposits in many personal and business accounts. That one factor separates Belize from many other offshore locations." He listed the other two reasons as the imposition which VAT imposes on those looking to invest in Europe and the stability of the nation politically compared to other countries in the region with favorable taxation policies.

Final Thoughts

The strong possibility of a recession is necessitating the need for investors to diversify their portfolios and hedge against the chances of a recession. One of the means in which investors can diversify their assets is through offshore investments as well as offshore banking. Luigi Wewege, an international banking expert, has recommended Belize banking to many investors due to the favorable tax climate, the VAT expense of investing in Europe, the political stability of Belize and the country pegs its dollar to the U.S. dollar at a rate of two to one. Wewege has helped clients from all over the world with offshore banking in Belize and this list includes places from Auckland, New Zealand to Hong Kong to Ireland to Panama City.