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Investors and recessions

A recession is often defined as two consecutive quarters of GDP contraction, and while there is indeed a more meaningful risk of recession emerging, particularly in Europe, modelling has estimated the chances of this happening at around 35% over the next 12 months in Australia, and 45% over the next 24 months, which is to say, it is not our base case scenario.

The Australian economy continues to grow, supported by low unemployment and robust household spending. Australia is also benefiting from high global energy prices, given our status as a net exporter of energy-related commodities such as coal. As interest rates rise at home and abroad, we expect economic growth to soften, however, it should not be sufficient to trigger a recession.

Also, while the turbulence in the share markets has somewhat petered out, investors should recognise that the volatility experienced this year is far from unusual. Rather, it is a factor that tends to spike when equity markets undergo a severe contraction. That said, the inevitable troughs that investors will experience over time often give way to higher peaks.

While there is no guarantee Australia will avoid a recession, investors could perhaps look to the past to help calm their nerves. Analysis using US stock market data over the last 48 years found that share markets tend to recover soon after recessions started. The earliest recovery began a mere two months after the COVID-induced economic downturn in 2020, while the recovery after the 2007-2009 Global Financial Crisis commenced 16 months into that recession.

Consider this final point – analysis has found that selling down during past recessions has proved to be a costly mistake for many investors. Those investors locked in their losses permanently because they were out of the market at the wrong time and thus weren’t able to benefit when it rose again.

After all, there’s been little evidence that timing the market delivers rewards. If anything, it has been quite the opposite.


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