Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 518

5 assets to protect you against a possible recession

As investors continue to grapple with higher rates, sticky inflation and market volatility, a defensively positioned portfolio could help to protect investors from macroeconomic and market risks.

Despite central banks around the world hiking rates at the most aggressive pace in recent times they are not even close to reaching their respective inflation target bands. As rates continue to rise so too does the risk of recession. Europe and New Zealand have already entered recessionary territory, and other countries may soon follow suit.

It’s not all doom and gloom, however. At some point during this year, we should see interest rates reaching their peak and inflation begin to subside. It’s going to take some time for inflation to fall back to the more stable 2-3% range. This will assist mortgage holders, renters, businesses, and the average Australian consumer with the cost of living.

Yet investors are contending with the unfortunate fact that historically, 75% of rate hike cycles in the US have resulted in a recession in the country since 1955.

US Federal Fund effective rate versus recession periods

Source: Board of Governors of the Federal Reserve System (US)

Macroeconomic indicators suggest that the US is in the last stage of the economic cycle with a recession likely by the end of 2023. The US government bond yields between the 2 and 10 year are inverted, and manufacturing activity is contracting. Yield inversion has historically been a leading indicator for a recession in the next 6 to 18 months. ISM Manufacturing PMI below 50 highlights that activity is contracting.

US ISM Manufacturing Index

Source: ISM

10yr less 2yr US government bond yield

Source: Bloomberg

And while the US has a potentially higher chance of entering a recession this year than Australia, it will be important to watch the key local economic data prints such as CPI, GDP and unemployment numbers as they provide an overall picture of the state of the economy. 

As Portfolio Managers we are often asked what type of defensive assets should be held during this period of the economic cycle. While there is no infallible answer, the tried and tested assets listed below should be considered as part of a defensive allocation for an investment portfolio:

1. Gold: is one of the oldest defensive assets and physical gold has a low correlation to other asset classes such as equities, bonds or property.  Currently there are several factors converging which could see the gold price reach an all-time high. The gold price is currently testing the base of its recent up trend at around $1,950 USD per ounce, and with the continued recessionary pressures and geopolitical risks there is every chance that gold will push above $2,000 again towards $2,075.  We think there is more chance of upside than downside currently and there has also been strong central bank buying of late helping to stabilise the price.

2. Short term US treasuries: are often described as one of the major almost risk-free asset classes, and they are now yielding about 5.2%.  We know that the US is still the leading global economy despite the economic headwinds it faces, the US should maintain this commanding position for years to come.  Many finance calculations and risk models require a base calculation for the risk and US treasuries are commonly used to represent the low-risk option.  As rates continue to rise, a short-term US Treasuries exposure can provide a reasonable hedge to markets.

3. Floating rate bonds: this type of bond adjusts its coupon based on an underlying interest rate, if interest rates go up the coupon on the bond also increases.  This minimises the risk of losing capital as interest rates go up.  In a fixed rate bond if interest rates go up the value of the bond goes down and hence the investor could lose part of their investment.  There are multiple floating rate options in Australia that are yielding 4.5% to 5.5% currently.

4. Global infrastructure: assets like electricity, water or gas companies, rail lines, pipelines, airports, toll roads, telecommunication towers are the backbone of modern society.  In the current inflationary environment many infrastructure companies can adjust their pricing to keep pace with inflation.  There is vast spending taking place by governments within infrastructure projects especially with ageing utilities and changing population needs. A recent report by consultancy firm McKinsey estimated that the developed world needs to spend $70 trillion by 2035 to maintain its ageing infrastructure.  Infrastructure also has a low correlation to other asset classes so can act as a portfolio diversifier while at the same time paying a reasonable yield.

5. Quality companies: Adjusting investments through a downturn is difficult as picking the top and bottom of the market is nearly impossible.  The focus should be on having the right asset mix, and in that respect, a focus on quality companies has proven to be one of the better options.  These are companies that have a high return on equity, stable year on year earnings growth and low debt.  Companies with these traits tend to fall less in a downturn and bounce back faster in a recovery.

We’ve obviously focused on defensive assets but there is often a bias to short term investment horizons rather than longer term.  The current economic cycle will play out over the next few years, but anyone investing for retirement, or over the longer term needs to be aware that by the time their investments are realised, the cycle will have changed.

At the start of 2023 there was a fair amount of negative talk about the global sharemarket and many investors pulled money out fearing short-term market declines.  However, the NASDAQ and S&P500 are up 30% and 15% respectively year to date. Anyone sitting on cash would have missed out on this upswing.

There are many ways to implement the defensive strategies listed above, ETF’s however offer an easy way to diversify your investments in a single trade. 


Jamie Hannah is Deputy Head of Investments & Capital Markets at VanEck Investments Limited, a sponsor of Firstlinks. This is general information only and does not take into account any person’s financial objectives, situation or needs. Any views expressed are opinions of the author at the time of writing and is not a recommendation to act.

For more articles and papers from VanEck, click here.


Steve Dodds
July 20, 2023

I'm curious about the recommendation of floating rate bonds as a defensive measure in a potential upcoming recession.

I can see their appeal in the current environment of rising rates, especially compared to the predictable but nasty returns from traditional bonds.

Presumably, however, if a recession does occur then interest rates will start to fall. This good news for those who manage to time the purchase of traditional bonds close to the peak as they should see capital gains.

But what happens to those whose defensive strategy includes floating rate bonds? Obviously the yield will fall as interest rates decline, but will there be capital losses as well?

In other words do floating rate bonds act inversely to fixed rate bonds, or more like cash?

Russel Chesler
July 21, 2023

Hi Steve. I'll jump in here as Jamie is on parental leave at present.

As the coupon paid on floating rate notes (FRNs) resets every three months based on three month BBSW, changes in interest rates have a negligible effect on the market value of FRNs. Changes in credit spreads do have an effect on market values. If we look at how FRNs performed in previous market crises, they only fell by small amounts in the GFC and more recently.

Credit spreads on Australian FRNs are currently above March 2020 levels. In our opinion credit spreads at these levels are already building in a slowdown in the Australian economy.

In terms of your last statement, “In other words do floating rate bonds act inversely to fixed rate bonds, or more like cash?”, FRNs do not work inversely to fixed rate bonds. In summary there can be market value losses on FRNs but based on history these have been limited, making FRNs a defensive asset.


Leave a Comment:



Is more trouble coming for the 60/40 portfolio?

Investors remain remarkably defensive during bull market

Rising recession risk and what it means for your portfolio


Most viewed in recent weeks

Where Baby Boomer wealth will end up

By 2028, all Baby Boomers will be eligible for retirement and the Baby Boomer bubble will have all but deflated. Where will this generation's money end up, and what are the implications for the wealth management industry?

Are term deposits attractive right now?

If you’re like me, you may have put money into term deposits over the past year and it’s time to decide whether to roll them over or look elsewhere. Here are the pros and cons of cash versus other assets right now.

Uncomfortable truths: The real cost of living in retirement

How useful are the retirement savings and spending targets put out by various groups such as ASFA? Not very, and it's reducing the ability of ordinary retirees to fully understand their retirement income options.

How retiree spending plummets as we age

There's been little debate on how spending changes as people progress through retirement. Yet, it's a critical issue as it can have a significant impact on the level of savings required at the point of retirement.

Meg on SMSFs: $3 million super tax coming whether we’re ready or not

A Senate Committee reported back last week with a majority recommendation to pass the $3 million super tax unaltered. It seems that the tax is coming, and this is what those affected should be doing now to prepare for it.

How much do you need to retire comfortably?

Two commonly asked questions are: 'How much do I need to retire' and 'How much can I afford to spend in retirement'? This is a guide to help you come up with your own numbers to suit your goals and needs.

Latest Updates


Is 'The Great Australian Dream' a sham?

Peter Dutton has made housing a key issue for the next election, pledging to “restore the Australian dream” of home ownership. It got me thinking about what this dream represents, how it originated, and whether it’s still relevant today.


Clime time: Taxing unrealised capital gains – is there a better idea?

The efficacy and fairness of establishing an unrealised gains tax regime will hopefully be hotly debated at the next election. We need better ideas on how to use the strategic and unique benefits of our massive super funds.


How long will you live?

We are often quoted life expectancy at birth but what matters most is how long we should live as we grow older. It is surprising how short this can be for people born last century, so make the most of it.

Investment strategies

What poker can teach us about investing

So-called ‘resulting’ is what poker players call the tendency to judge a decision based on its outcome rather than its quality. It's something that happens a lot in investing, though should be avoided at all costs.

Latest from Morningstar

Should you buy and hold an Artificial Intelligence portfolio?

For those with the patience to own an investment as volatile as the AI sector, buying and holding a stock basket might make sense. However, based on internet stocks’ history, you need not rush to do so.


The bull market in commodities may be just starting

The world is entering a higher cost environment which will hit the profits of companies in many sectors. A key beneficiary will be commodities, where supply shortages are meeting increasing demand from AI and green energy.


The challenges facing electric vehicles

Slowing demand and profit warnings from the EV manufacturers has seen analysts revise down their EV penetration forecasts. What's behind the slowdown, and are the issues a blip or something more serious?



© 2024 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.