We are only three days into 2023 and the expectations of a recession this year are mounting. A tougher economic environment could mean even more pain for ASX shares after an already brutal 12-month stint for investor portfolios last year.
How dire could it really get in 2023? According to the managing director at the International Monetary Fund (IMF), Kristalina Georgieva, quite dire indeed. In a recent interview, Georgieva revealed that the IMF expects one-third of the world economy to be in recession this year.
I'm not concerned about what a company's share price does in the short term. However, a recession can have real impacts on a portfolio. The main concerns for investors, in my opinion, are:
- Potential for companies to go bankrupt, resulting in permanent loss
- Exiting long-term investment strategy due to the psychological toll created by volatility
- Concentrating investments in long-term underperformers
Here's how I plan to recession-proof my ASX share portfolio this year and hopefully not succumb to the above pitfalls.
Image source: Getty Images
Short rope for debt dependents
The most at-risk ASX shares of bankruptcy in a recession are those that are unprofitable and rely on debt to fund operations and/or development.
The possibility of interest rates sustaining between 2% to 3% and a slowing economy could make funding harder to come by. If the company can't produce its own capital to continue operations, it could fall on its sword.
To try to avoid a 100% loss, I'll be quick to cut loose any such companies in my portfolio that begin to show signs of financial distress. Furthermore, I won't be deploying cash to any new investments that hold these characteristics in 2023.
One such holding I'm currently wary of is Genex Power Ltd (ASX: GNX). As of June 2022, the clean energy developer was saddled with $322 million in net debt. The company is in the process of a costly endeavour to construct a hydro project, which could put it at financial risk if costs blow out.
Smoother ride with more ASX shares
Often the greatest enemy to our investing success is ourselves. You can invest in the greatest companies in the world but if volatility gets the better of you when the market crashes, you will never enjoy the fruits of your labour — that's where diversification comes in handy.
To recession-proof my ASX portfolio against my own undoing, I plan to hold a greater variety of companies. My portfolio is heavily exposed to the tech industry with approximately a 46% weighting.
For my risk appetite, this is adequate. However, I personally want to keep this below 50% this year so that any drawdown, specifically in tech, doesn't deal too harsh a blow to my psyche.
Dodging the biggest mistake
Investing in 'safe' ASX shares probably isn't something that is usually highlighted as a possible mistake. Yet, I believe it could be one of the most detrimental traps to fall into in anticipation of, and during, a recession.
The inclination to abandon all growth investments and buy blue chips like National Australia Bank Ltd (ASX: NAB) and Telstra Group Ltd (ASX: TLS) might be tempting, but it could lead to severe underperformance long term.
These 'safe' ASX shares have underperformed the S&P/ASX 200 Index (ASX: XJO) by 18% and 42% respectively since June 2008, as shown above.
A small portion of my portfolio is held for defensive ASX shares such as Commonwealth Bank of Australia (ASX: CBA) and CSR Limited (ASX: CSR). However, I will continue to add companies with large opportunities still ahead of them.
Companies like Pro Medicus Limited (ASX: PME) and Jumbo Interactive Ltd (ASX: JIN) operate in underdeveloped and riskier markets. But the lack of market saturation means there could be much more growth in the future.
