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Recession Risk: Which Sectors are Least Vulnerable?

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Recession Risk: Which Sectors Are Least Vulnerable?

Recession Risk: Which Sectors Are Least Vulnerable?

Recession Risk: Which Sectors are Least Vulnerable?

In the context of a potential recession, some sectors may be in better shape than others.

They share several fundamental qualities, including:

  • Less cyclical exposure
  • Lower rate sensitivity
  • Higher cash levels
  • Lower capital expenditures

With this in mind, the above chart looks at the sectors most resilient to recession risk and rising costs, using data from Allianz Trade.

Recession Risk, by Sector

As slower growth and rising rates put pressure on corporate margins and the cost of capital, we can see in the table below that this has impacted some sectors more than others in the last year:

SectorMargin (p.p. change)
🛒 Retail
-0.3
📝 Paper-0.8
🏡 Household Equipment-0.9
🚜 Agrifood-0.9
⛏️ Metals-0.9
🚗 Automotive Manufacturers
-1.1
🏭 Machinery & Equipment-1.1
🧪 Chemicals-1.2
🏥 Pharmaceuticals-1.8
🖥️ Computers & Telecom-2.0
👷 Construction-5.7

*Percentage point changes 2021- 2022.

Generally speaking, the retail sector has been shielded from recession risk and higher prices. In 2023, accelerated consumer spending and a strong labor market has supported retail sales, which have trended higher since 2021. Consumer spending makes up roughly two-thirds of the U.S. economy.

Sectors including chemicals and pharmaceuticals have traditionally been more resistant to market turbulence, but have fared worse than others more recently.

In theory, sectors including construction, metals, and automotives are often rate-sensitive and have high capital expenditures. Yet, what we have seen in the last year is that many of these sectors have been able to withstand margin pressures fairly well in spite of tightening credit conditions as seen in the table above.

What to Watch: Corporate Margins in Perspective

One salient feature of the current market environment is that corporate profit margins have approached historic highs.

Recession Risk: Corporate Margins Near Record Levels

As the above chart shows, after-tax profit margins for non-financial corporations hovered over 14% in 2022, the highest post-WWII. In fact, this trend has been increasing over the past two decades.

According to a recent paper, firms have used their market power to increase prices. As a result, this offset margin pressures, even as sales volume declined.

Overall, we can see that corporate profit margins are higher than pre-pandemic levels. Sectors focused on essential goods to the consumer were able to make price hikes as consumers purchased familiar brands and products.

Adding to stronger margins were demand shocks that stemmed from supply chain disruptions. The auto sector, for example, saw companies raise prices without the fear of diminishing market share. All of these factors have likely built up a buffer to help reduce future recession risk.

Sector Fundamentals Looking Ahead

How are corporate metrics looking in 2023?

In the first quarter of 2023, S&P 500 earnings fell almost 4%. It was the second consecutive quarter of declining earnings for the index. Despite slower growth, the S&P 500 is up roughly 15% from lows seen in October.

Yet according to an April survey from the Bank of America, global fund managers are overwhelmingly bearish, highlighting contradictions in the market.

For health care and utilities sectors, the vast majority of companies in the index are beating revenue estimates in 2023. Over the last 30 years, these defensive sectors have also tended to outperform other sectors during a downturn, along with consumer staples. Investors seek them out due to their strong balance sheets and profitability during market stress.

S&P 500 SectorPercent of Companies With Revenues Above Estimates (Q1 2023)
Health Care90%
Utilities88%
Consumer Discretionary81%
Real Estate
81%
Information Technology78%
Industrials78%
Consumer Staples74%
Energy70%
Financials65%
Communication Services58%
Materials31%

Source: Factset

Cyclical sectors, such as financials and industrials tend to perform worse. We can see this today with turmoil in the banking system, as bank stocks remain sensitive to interest rate hikes. Making matters worse, the spillover from rising rates may still take time to materialize.

Defensive sectors like health care, staples, and utilities could be less vulnerable to recession risk. Lower correlation to economic cycles, lower rate-sensitivity, higher cash buffers, and lower capital expenditures are all key factors that support their resilience.

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Mapped: GDP Growth Forecasts by Country in 2024

Will global GDP growth continue to be resilient in 2024? This graphic shows the economic outlook for 191 economies around the world.

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This map shows GDP growth projections in 2024.

Mapped: GDP Growth Forecasts by Country in 2024

Resilient GDP growth and falling inflation are spurring a brighter outlook for 2024, although cautions remain across global economies.

While investors are hopeful that U.S. rate cuts could happen as early as May, the Fed has signaled that it won’t “declare victory” too soon. As countries around the world maneuver a complex landscape, they are faced with a scope of risks that include inflationary spikes, rising debt loads, and dwindling consumer savings.

This graphic shows global GDP growth projections in 2024, based on the International Monetary Fund (IMF) October 2023 Outlook and January 2024 update.

Global GDP Growth Outlook 2024

In 2024, real GDP growth is forecast to increase 3.1%, a slight rise from October’s outlook.

While positive growth is projected across all regions, it varies widely due to many factors spanning from the effects of higher borrowing costs to low consumer sentiment. Here are forecasts across 191 countries worldwide:

Country2024 Real GDP % Change (Projected)2023 Real GDP % Change (Estimate)
🇦🇱 Albania3.3%3.6%
🇩🇿 Algeria3.1%3.8%
🇦🇩 Andorra1.5%2.1%
🇦🇴 Angola3.3%1.3%
🇦🇬 Antigua and Barbuda5.4%5.6%
🇦🇷 Argentina2.8%-2.5%
🇦🇲 Armenia5.0%7.0%
🇦🇼 Aruba1.2%2.3%
🇦🇺 Australia1.2%1.8%
🇦🇹 Austria0.8%0.1%
🇦🇿 Azerbaijan2.5%2.5%
🇧🇸 The Bahamas1.8%2.7%
🇧🇭 Bahrain3.6%6.0%
🇧🇩 Bangladesh6.0%4.5%
🇧🇧 Barbados3.9%1.6%
🇧🇾 Belarus1.3%1.0%
🇧🇪 Belgium0.9%4.0%
🇧🇿 Belize3.0%5.5%
🇧🇯 Benin6.3%5.3%
🇧🇹 Bhutan3.0%1.8%
🇧🇴 Bolivia1.8%2.0%
🇧🇦 Bosnia and Herzegovina3.0%3.8%
🇧🇼 Botswana4.1%3.1%
🇧🇷 Brazil*1.7%-0.8%
🇧🇳 Brunei Darussalam3.5%1.7%
🇧🇬 Bulgaria3.2%4.4%
🇧🇫 Burkina Faso6.4%3.3%
🇧🇮 Burundi6.0%4.4%
🇨🇻 Cabo Verde4.5%5.6%
🇰🇭 Cambodia6.1%4.0%
🇨🇲 Cameroon4.2%1.3%
🇨🇦 Canada*1.4%1.0%
🇨🇫 Central African Republic2.5%4.0%
🇹🇩 Chad3.7%-0.5%
🇨🇱 Chile1.6%5.0%
🇨🇳 China*4.6%1.4%
🇨🇴 Colombia2.0%3.0%
🇰🇲 Comoros3.5%4.4%
🇨🇩 Democratic Republic of the Congo4.7%2.7%
🇨🇬 Republic of Congo4.4%6.2%
🇨🇷 Costa Rica3.2%2.2%
🇨🇮 Côte d'Ivoire6.6%0.2%
🇭🇷 Croatia2.6%6.7%
🇨🇾 Cyprus2.7%1.7%
🇨🇿 Czech Republic2.3%5.0%
🇩🇰 Denmark1.4%4.6%
🇩🇯 Djibouti6.0%3.0%
🇩🇲 Dominica4.6%1.4%
🇩🇴 Dominican Republic5.2%4.2%
🇪🇨 Ecuador1.8%2.2%
🇪🇬 Egypt3.6%-6.2%
🇸🇻 El Salvador1.9%-2.3%
🇬🇶 Equatorial Guinea-5.5%3.1%
🇪🇪 Estonia2.4%6.1%
🇸🇿 Eswatini3.3%7.5%
🇪🇹 Ethiopia6.2%-0.1%
🇫🇯 Fiji3.9%1.0%
🇫🇮 Finland1.0%2.8%
🇫🇷 France*1.0%6.2%
🇬🇦 Gabon2.6%-0.5%
🇬🇲 The Gambia6.2%1.2%
🇬🇪 Georgia4.8%2.5%
🇩🇪 Germany*0.5%3.9%
🇬🇭 Ghana2.7%3.4%
🇬🇷 Greece2.0%5.9%
🇬🇩 Grenada3.8%4.5%
🇬🇹 Guatemala3.5%38.4%
🇬🇳 Guinea5.6%-1.5%
🇬🇼 Guinea-Bissau5.0%2.9%
🇬🇾 Guyana26.6%4.4%
🇭🇹 Haiti1.4%-0.3%
🇭🇳 Honduras3.2%3.3%
🇭🇰 Hong Kong SAR2.9%6.3%
🇭🇺 Hungary3.1%5.0%
🇮🇸 Iceland1.7%-2.7%
🇮🇳 India*6.5%2.0%
🇮🇩 Indonesia5.0%3.0%
🇮🇷 Iran2.5%3.1%
🇮🇶 Iraq2.9%0.7%
🇮🇪 Ireland3.3%2.0%
🇮🇱 Israel3.0%2.0%
🇮🇹 Italy*0.7%2.6%
🇯🇲 Jamaica1.8%4.6%
🇯🇵 Japan*0.9%5.0%
🇯🇴 Jordan2.7%2.6%
🇰🇿 Kazakhstan4.2%1.4%
🇰🇪 Kenya5.3%3.8%
🇰🇮 Kiribati2.4%-0.6%
🇰🇷 Korea2.2%3.4%
🇽🇰 Kosovo4.0%4.0%
🇰🇼 Kuwait3.6%0.5%
🇰🇬 Kyrgyz Republic4.3%2.1%
🇱🇦 Lao P.D.R.4.0%4.6%
🇱🇻 Latvia2.6%12.5%
🇱🇸 Lesotho2.3%-0.2%
🇱🇷 Liberia5.3%-0.4%
🇱🇾 Libya7.5%74.4%
🇱🇹 Lithuania2.7%4.0%
🇱🇺 Luxembourg1.5%1.7%
🇲🇴 Macao SAR27.2%4.0%
🇲🇬 Madagascar4.8%8.1%
🇲🇼 Malawi3.3%4.5%
🇲🇾 Malaysia4.3%3.8%
🇲🇻 Maldives5.0%3.0%
🇲🇱 Mali4.8%4.5%
🇲🇹 Malta3.3%5.1%
🇲🇭 Marshall Islands3.0%3.2%
🇲🇷 Mauritania5.3%2.6%
🇲🇺 Mauritius3.8%2.0%
🇲🇽 Mexico*2.7%5.5%
🇫🇲 Micronesia3.1%4.5%
🇲🇩 Moldova4.3%2.4%
🇲🇳 Mongolia4.5%7.0%
🇲🇪 Montenegro3.7%2.6%
🇲🇦 Morocco3.6%2.8%
🇲🇿 Mozambique5.0%0.5%
🇲🇲 Myanmar2.6%0.8%
🇳🇦 Namibia2.7%0.6%
🇳🇷 Nauru1.3%1.1%
🇳🇵 Nepal5.0%3.0%
🇳🇱 Netherlands1.2%4.1%
🇳🇿 New Zealand1.0%2.9%
🇳🇮 Nicaragua3.3%2.5%
🇳🇪 Niger11.1%2.3%
🇳🇬 Nigeria*3.0%1.2%
🇲🇰 North Macedonia3.2%-0.5%
🇳🇴 Norway1.5%0.8%
🇴🇲 Oman2.7%6.0%
🇵🇰 Pakistan2.5%3.0%
🇵🇼 Palau12.4%4.5%
🇵🇦 Panama4.0%1.1%
🇵🇬 Papua New Guinea5.0%5.3%
🇵🇾 Paraguay3.8%0.6%
🇵🇪 Peru2.7%2.3%
🇵🇭 Philippines5.9%-0.7%
🇵🇱 Poland2.3%2.4%
🇵🇹 Portugal1.5%4.0%
🇵🇷 Puerto Rico-0.2%2.2%
🇶🇦 Qatar2.2%2.2%
🇷🇴 Romania3.8%6.2%
🇷🇺 Russia*2.6%0.5%
🇷🇼 Rwanda7.0%8.0%
🇼🇸 Samoa3.6%2.2%
🇸🇲 San Marino1.3%0.8%
🇸🇹 São Tomé and Príncipe2.4%4.1%
🇸🇦 Saudi Arabia*2.7%2.0%
🇸🇳 Senegal8.8%4.2%
🇷🇸 Serbia3.0%2.7%
🇸🇨 Seychelles3.9%1.0%
🇸🇱 Sierra Leone4.7%1.3%
🇸🇬 Singapore2.1%2.0%
🇸🇰 Slovak Republic2.5%2.5%
🇸🇮 Slovenia2.2%2.8%
🇸🇧 Solomon Islands2.4%0.9%
🇸🇴 Somalia3.7%3.5%
🇿🇦 South Africa*1.0%2.5%
🇸🇸 South Sudan4.2%4.9%
🇪🇸 Spain*1.5%3.2%
🇰🇳 St. Kitts and Nevis3.8%6.2%
🇱🇨 St. Lucia2.3%-18.3%
🇻🇨 St. Vincent and the Grenadines5.0%2.1%
🇸🇩 Sudan0.3%-0.7%
🇸🇷 Suriname3.0%0.9%
🇸🇪 Sweden0.6%4.0%
🇨🇭 Switzerland1.8%0.8%
🇹🇼 Taiwan3.0%6.5%
🇹🇯 Tajikistan5.0%5.2%
🇹🇿 Tanzania6.1%2.7%
🇹🇭 Thailand3.2%4.3%
🇹🇱 Timor-Leste3.1%5.6%
🇹🇬 Togo5.3%1.5%
🇹🇴 Tonga2.5%5.4%
🇹🇹 Trinidad and Tobago2.2%2.6%
🇹🇳 Tunisia1.9%2.5%
🇹🇷 Türkiye3.0%1.3%
🇹🇲 Turkmenistan2.1%2.5%
🇹🇻 Tuvalu3.5%3.9%
🇺🇬 Uganda5.7%4.6%
🇺🇦 Ukraine3.2%2.0%
🇦🇪 United Arab Emirates4.0%3.4%
🇬🇧 United Kingdom*0.6%0.5%
🇺🇸 U.S.*2.1%2.1%
🇺🇾 Uruguay3.3%1.0%
🇺🇿 Uzbekistan5.5%5.5%
🇻🇺 Vanuatu2.6%1.5%
🇻🇪 Venezuela4.5%4.0%
🇻🇳 Vietnam5.8%4.7%
🇵🇸 West Bank and Gaza2.7%3.0%
🇾🇪 Yemen2.0%-0.5%
🇿🇲 Zambia4.3%3.6%
🇿🇼 Zimbabwe3.6%4.1%

*Reflect updated figures from the January 2024 IMF Update

In the United States, GDP growth is projected to remain moderately strong, supported by rising real wages boosting consumption across the economy.

Yet compared to last year, growth is set to slow amid a softening labor market. In 2024, Citigroup announced it was laying off 20,000 employees after a disappointing year. Meanwhile, tech firms such as Google, Amazon, and Salesforce are reducing headcounts. Along with this, package delivery giant UPS announced 12,000 job cuts.

In China, property market woes are dragging on economic growth. Declining real estate values have impacted incomes, assets, and the public mood. Due to these headwinds, consumption growth is forecast to drop over the year.

Over in Latin America, Chile and Brazil were among the first emerging countries to hike interest rates in 2021—and they were some of the first to cut them last year. Thanks to improving domestic demand amid dissipating price spikes, the IMF upgraded the outlooks for Brazil and Mexico in 2024.

The lowest growth across all regions is forecast to be seen in Europe, at 0.9%. In late 2023, Signa, a multi-billion European property firm collapsed following the sharpest rise in interest rates in the European Union’s 25-year history. Also dimming the outlook is low consumer sentiment and the impact of high energy prices.

What are the Key Risks?

While no one holds a crystal ball, there are certain risks outlined by the IMF that could negatively impact global GDP growth:

  • Sharply Rising Commodity Prices: If geopolitical tensions escalate in the Israel-Hamas war, it could spillover into the broader region leading to spikes in energy prices. Over a third of global oil exports are based out of the region, in addition to 14% of global gas exports. Adding to this, 11% of international trade passes through the Red Sea, which has seen continued attacks between Iran-backed Houthi rebels and strikes from the U.S. and its allies.
  • Stubborn Inflation: A return of supply disruptions paired with an overheated labor market could add inflationary pressures, potentially leading to higher interest rates. In turn, stock markets could respond adversely and financial stability could deteriorate.
  • China’s Economy Slows: A property market rout could hurt domestic growth and consumer confidence, leading to declining consumption across the country. Accounting for nearly 19% of global GDP (PPP) in 2023, a slowing Chinese economy could impact countries that rely on trade with China.

While these risks remain present, the economy could witness positive surprises as well. Should inflation fall faster than expected, it would likely lead to monetary easing and a boost to global economic growth. Overall, the global economy defied expectations in 2023, and it may do the same in 2024.

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Chart: Is ESG Investing in Decline?

After the pandemic boom, ESG investments lost their luster amid high interest rates. Could they make a comeback?

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This graphic shows flows of ESG investments in the U.S.

Is ESG Investing in Decline?

These days, ESG investments have lost their luster given high interest rates, political backlash, and greenwashing scrutiny.

In 2021 during the pandemic boom, U.S. sustainable funds hit a record $358 billion in assets, up from $95 billion in 2017. But since then, investor interest has waned as higher borrowing costs impact capital-intensive clean tech stocks.

This graphic shows the drop in sustainable fund flows—often considered an indicator of investor sentiment—based on data from Morningstar.

Slowing Demand

In 2023, investor appetite cooled for sustainable investments, as fund flows notched their worst year on record.

Overall, flows sank $13 billion as fund performance lagged behind conventional funds. Adding to this, concerns surrounding the murkiness of environmental, social, and governance (ESG) ratings were put under the spotlight.

As ESG pushback intensified in U.S. politics, at least 165 anti-ESG bills were introduced in 2023. Politicians have claimed that ESG criteria negatively impacts financial returns, but evidence behind that is mixed.

While sustainable funds underperformed traditional funds in 2023, a separate study showed that ESG portfolios had as much as 6% excess returns annually compared to benchmark indexes between 2014 and 2020.

ESG Investments: A Closer Look

One key aspect of ESG funds is whether they hold investments that align with the UN Sustainable Development Goals (SDGs).

Globally, 542 funds with $125 billion in assets are associated with at least one of these objectives. The table below shows the top five SDGs, by ETF assets under management (AUM).

SDGGoalNumber of ETFsAUM
SDG 13Climate Action275$65.4B
SDG 7Affordable
and Clean Energy
80$15.3B
SDG 9Industry, Innovation,
and Infrastructure
49$13.4B
SDG 6Clean Water
and Sanitation
16$9.1B
SDG 11Sustainable Cities
and Communities
34$5.5B

Source: Trackinsight. As of January 7, 2024.

We can see that Climate Action is the highest overall, with companies held in these ETFs making commitments to lower emissions and advance sustainability.

For instance, Home Depot has cut electricity use by over 50% since 2010 in U.S. stores, and aims to use renewables for all of its electricity by 2030. In addition, Microsoft has committed to this goal through a number of initiatives, including providing access to clean water to over one million people across Indonesia, Brazil, India, and Mexico in 2023.

While investor interest has slowed, 35% of advisors said they used ESG funds last year, based on a Journal of Financial Planning survey. As the industry matures, it remains to be seen if ESG investments will see a resurgence, especially if interest rates fall in the coming years.

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