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David Rosenberg: Prepare your portfolio to be ready for recession

I came across this summary from Barry Ritholtz site on what David Rosenberg, a mega bear recommends investors to be ready in the event of a recession. How ready is my portfolio then?

His 7 point plan to be ready for the next recession includes:

1) “High-quality corporates” plus companies with “A-type” balance sheets and “BB-like yields.”

I think what he is referring here are big US companies that have great balance sheets yet have above average yields.

These would be your Consolidated Edison, Dominion, Verizon, AT&T.

In Singapore context, the ones that are closest are your STI listed companies that have above average yields.

Amongst them for me are SPH, Singtel, Starhub, Venture, ST Engineering, SIA Engineering, SATS,Ascendas REIT, Capitamall Trust.

I currently only have SPH, Singtel, Starhub that matches this category. I do also hold ST Engineering units which would classify under this.

2) Reliable dividend paying Stocks (including preferreds).

These are stocks or preferred shares that pays a stream of dividend even during the recession. They might reduce their payouts or halt payouts but that will still be a good return in the recession.

Amongst them is your DBS NCPS, OCBC NCPS and Hyflux CPS for preferreds. There are your REITs and Business Trusts.  There is your blue chip dividend stocks like those mentioned in (1).

So currently in my portfolio that would be almost everything! (Since I am a dividend investor)

3) Low debt-to-equity ratios, high liquid asset ratios, good balance sheets, no heavy debt.

Basically it is those company with high quality balance sheets. They don’t have too much debts and have ample cash to pay off contingency.

Currently in my portfolio,

Starhub – Debt to asset is 44% but Operating Cash Flow enables Starhub the capability to pay of debts in 1.4 years. Safe.

Aims Amp REIT – 30% Debt to Asset, Debts may be maturing and in need of refinance. Not that Safe.

Cache Logistic Trust – 30% Debt to Asset, recently on an acquisition trail. Gearing is going up and up. Not that Safe.

First REIT – 12% Debt to Asset. Yet with more cash that net debt its even lower. Although need to refinance but ok. Safe.

GRP – Net Cash. Safe.

Singtel -  20% Debt to Asset, operating cash flow enables Singtel to clear debt in 1.3 years rough. Safe.

SPH – 34% Debt to Asset. On the high side but still with good cash flow generating capability, should be not a big problem.  Medium Risk.

Singapore Post – Almost 30% Debt to Asset. On the high side. Medium Risk.

Sabana REIT – 24% Debt to Asset. Net debt it is 20%. Limited re-financing options for Shariah REIT. Medium Risk.

Sarin Technologies – Almost Net Cash. Safe

Straco – Net Cash. Safe

ARA – Almost Net Cash. Safe

PEC -  Net Cash. Safe

Global Investments – Net Cash. Safe.

4) Hard assets: Oil and gas royalties, REITs –  focus on income stream.

I don’t have that much Master Limited Partnerships or MLP but do have enough REITs as mentioned.

5) Sectors / companies with “low fixed costs, high variable costs, high barriers to entry/some sort of oligopolistic features, a relatively high level of demand inelasticity.” This includes utilities, consumer staples + health care.

These would be the companies with strong economic moats.

Starhub and Singtel – Oligopolistic utilities that people cannot do without.

Aims Amp REIT, Cache Log and Sabana – Tenants may not renew but that will impact income but not a going concern.

Singapore Post, SPH, Straco – Affected by recession. Income affected but should not be a going concern.

ARA – Competitive business advantage should still see it relatively unaffected.

PEC, Global Investments. GRP, Straco – Strong balance sheet should still see it being around, but to different degrees business will be affected. There may be periods of low to negative income.

6) Alternative assets that do not rely on “rising equity markets” or are independent of volatility trades.

Not much but likely I will add SDS, VXX, TLT which are either ultra short ETFs or treasury ETFs and USD ETFs when the first signs approach.

7) Precious metals. Specifically, he puts a $3,000 target on Gold.

I don’t have Gold or Silver in the portfolio.

Conclusion

All in all, a portfolio ready for recession is not one that WILL NOT GO DOWN. It should let you ride the volatility and still be around after the next recession.

My suggestion is to pare down on those that are much more affected by market cycles and also those that in past recession have shown to have a lot of weak holders.

Hedging and taking advantage with Short ETFs, USD ETFs may be a good way to balance things up.

Gold and Silver may spike and go down and would likely only recover mid recession.

Cash is still your best friend most of the time. It enables you to pick up those things you missed out on last time and this time make sure you do not.

So how ready are your portfolio?

For those interested in tracking my most current holdings, you can review my portfolio over here. Learn to use our Free Stock Portfolio Tracking Google Spreadsheet to track stock transactions.

Learning from Charlie Munger on value investing and life
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Kee wah

Monday 10th of September 2012

Definitely me to rebook at my portfolio

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