As 2022 draws to a close, there is no shortage of commentary about what a turbulent year it has been.
The mood turned bearish around March when the US Federal Reserve hiked interest rates for the first time in three years as inflation came in hotter than expected.
Initially, the stock market did not react strongly to this move.
However, with inflation hitting four-decade highs, the US central bank responded aggressively.
Within nine months, interest rates were raised to their highest level in 15 years as the Fed’s aggressive rate hikes brought the benchmark rate to between 4.25% and 4.5%.
The steep rise left its mark.
As of the date of writing, the NASDAQ and S&P 500 Indices had fallen by over 33% and 20%, respectively, pushing both into bear market territory.
Investors, at this point, may be wondering what’s in store for 2023.
The Federal Reserve has committed to raising interest rates further, possibly to above 5.1%, to continue to quell runaway inflation.
Elsewhere, experts are pencilling in the possibility of a recession in the US while analysts are projecting a fall in corporate earnings as we head into the New Year.
It’s going to be a tough year to navigate the markets, but here are five ways you can position your portfolio so that you can weather this storm.
1. Businesses with pricing power
Inflation is a headache for consumers and businesses alike.
But it’s easy to forget that businesses with strong brands can charge higher prices to offset this inflation without suffering a fall in demand.
Such businesses have what is known as “pricing power” as they hold the dominant mind-share of customers within their respective industries.
By loading up on shares of such stocks, they can help you offset the effects of inflation.
Take VICOM (SGX: WJP) for instance.
The vehicle inspection company has a market share of close to 75% and had just raised its car inspection prices on 1 November by 5% from S$64.20 to S$67.41.
With vehicle inspection being a mandatory requirement, vehicle owners will be unable to dodge this price increase.
VICOM should therefore not expect inspection volumes to fall.
For another example, coffee chain Starbucks (NASDAQ: SBUX), which operates around 35,000 outlets worldwide, saw its revenue for fiscal 2022 (ending 30 September) rise 11% year on year to a record US$32.3 billion.
On the company’s earnings call, it mentioned that prices have increased by 6% and yet it has not seen a corresponding fall in customer loyalty or transactions.
Cruise company Norwegian Cruise Lines (NYSE: NCLH) has also raised its prices to pass on higher costs to its customers, while the owner of SPAM, Hormel Foods (NYSE: HRL), is also targeting price increases as it grapples with inflation.
These US companies managed to raise their prices to counteract the effects of high inflation and with their strong market positions, investors can be confident that they can continue to do so.
2. No or low debt
Surging interest rates are a bane for homeowners as mortgage loans become more expensive.
For corporations with debt, higher rates also mean increased borrowing costs that eat into profits.
Investors, though, can eschew debt-heavy companies in favour of those with either low or no debt.
Businesses with little or zero debt are safe from rising interest rates and will not suffer the same level of financial stress as companies stuffed with loans.
VICOM is in the spotlight once again for this attribute.
The company has a clean balance sheet with S$58.7 million of cash with zero debt as of 30 September.
Human resource company HRNetGroup (SGX: CHZ) is another cash-rich company with S$312.7 million of cash and no debt as of 30 June.
Meanwhile, Micro-Mechanics (Holdings) (SGX: 5DD), a designer and manufacturer of parts and tools used to assemble semiconductors, was sitting on S$25.3 million of cash and had no debt as of 30 September.
For something more familiar, your favourite curry puff seller, Old Chang Kee (SGX: 5ML), held S$30.1 million of cash with just S$4.7 million of borrowings for its latest half-year results.
3. Recession-proofing your portfolio
A recession could be on the cards for Singapore in 2023.
Rather than feeling worried, investors should treat recessions as a normal part of the economic cycle and not feel fearful.
Such events should be viewed as opportunities to scoop up shares of solid businesses that have been beaten down.
But if you’re worried as to whether a recession will adversely impact your investments, it’s a good idea to stick with tried and tested blue-chip names.
Yes, I am talking about stocks such as the three local banks DBS Group (SGX: D05), United Overseas Bank (SGX: U11) and OCBC Ltd (SGX: O39).
These banks have been through numerous boom and bust cycles over the decades and have weathered these crises just fine.
Singapore Exchange Limited (SGX: S68) is another solid business as it has a natural monopoly, being the only bourse operator here.
These four stocks also pay out healthy dividends that can provide you with a stream of passive income as you wait for the storm clouds to clear up.
Meanwhile, you can also pepper your portfolio with recession-resistant companies.
Sheng Siong (SGX: OV8) is a supermarket retailer with 66 stores that provide a comprehensive range of food products, household items and necessities.
Raffles Medical Group (SGX: BSL) and Q&M Dental Group (SGX: QC7) should also see steady demand during a downturn as both companies provide essential medical and dental services, respectively.
4. Resilient US growth stocks
US indices have suffered a sharp fall this year but there are still businesses there that continue to thrive.
Visa (NYSE: V) reported a strong set of earnings for its fiscal 2022, with revenue rising 22% year on year to US$29.3 billion and net profit climbing 21% year on year to US$14.9 billion.
Despite the pandemic, yoga apparel maker Lululemon (NASDAQ: LULU) saw its revenue climb from US$3.98 billion to US$6.26 billion from 2020 to 2022 (the company has a January year-end).
In addition, net profit increased from US$645.6 million to US$975.3 million over the same period.
It pays to be selective and focus on businesses that generate healthy profits and continued free cash flow as these can enable them to better tide through tough times.
5. Keeping cash handy
Finally, you should always keep a reasonable stash of cash to act as an opportunity fund.
As the saying goes – you can’t predict, but you can prepare.
No one knows how markets will fare next year as there are too many moving parts at play.
Therefore, it’s useful to keep cash handy to take advantage of any sharp sell-downs so that you can pick up your favourite stocks.
Here’s wishing everyone a Happy New Year and may your investments turn out to be fruitful!
Note: An earlier version of this article appeared in The Business Times.
Want to know what to expect in the stock market in 2023? Which were the best performing stocks and blue chips in the Singapore market in 2022? Be prepared for 2023 with our special FREE report. Click HERE to download “Year in Review 2022”
Disclaimer: Royston Yang owns shares of Starbucks, Visa, Tractor Supply Company, VICOM, Micro-Mechanics (Holdings) Ltd, DBS Group, Singapore Exchange Limited, Boustead Singapore Limited and Raffles Medical Group.