Investing through a recession
A guide to investing through a recession
With high inflation and rising interest rates continuing to bite into the economy, the Bank of England is forecasting a recession in the UK, beginning towards the end of this year, and lasting until the end of 2023.1 And it’s not just the UK – growth around the globe is being snuffed out as economies suffer under the yoke of inflation, with Nomura Bank forecasting the EU, Japan, Korea, Australia and Canada as likely to fall into recessions too.2
The value of stock markets reflects economic expectations, and as such, we have seen sharp falls this year as inflation has risen and increasingly gloomy economic forecasts are folded into the price of assets. And yet, given depressed markets, some company valuations are beginning to look attractive, and history tells us that times like these can be opportune moments to invest, especially if things improve and markets take off.3
Of course, we must be mindful of the risks to stock market investing in this climate. Economically, things could get worse, company profits may fall further than investors forecast, and central banks will be likely forced to add to the pain by raising our borrowing costs in an attempt to quash inflation.
Here’s three top tips for investing through a recession:
1) Diversify across different companies, sectors and markets
The unusual nature of the economic downturn we’re facing means economies, markets and company sectors around the globe are likely to be affected to varying degrees. What is more, the stocks we traditionally hide in may not be so resilient, and the ones we ordinarily avoid may do better.
For example, during Covid’s recession, investors sought refuge in the robust balance sheets and strong growth of ‘quality growth’ stocks, and yet, this year we’ve seen them being heavily impacted by rising interest rates, which are likely to continue rising for some time. ‘Value’ stocks, given their economic sensitivity, were dumped during Covid, but this time around they may be boosted by rising interest rates and high energy prices, with low valuations acting as a potential buffer if markets fall further.
It means at times like these, wide diversification across companies, sectors and markets has never been more important.
2) Market dislocations call for active management
When economies boom, companies and markets rise more broadly, yet during recessions, the complex interplay of rumbling economic forces creates increasingly binary outcomes for businesses. Stock pickers can exploit market dislocations much more effectively than rigid passive strategies such as trackers, and are able to mitigate risks by avoiding companies overly exposed to recessionary risks. As such, an active approach has advantages in volatile markets.
3) Dividends become an important part of total returns
Dividends have recovered quickly from the ravages of Covid, and while a recession may impact earnings, dividends tend to be far less volatile. What is more, companies have largely rebuilt their balance sheets and dividend cover is strong, with cover for the FTSE100 forecast at 2.16 earning for 2023, according to investing platform AJ Bell.4
Seeking dividends is wise during turbulent times as income becomes an invaluable part of a total return when stock prices are volatile and capital gains may be lackluster.
Alliance Trust invests uses a best-in-class multi-manager approach to global equity investing with asset allocation that aims to maintain wide diversification across sectors, regions, and investing styles, delivering more than 50 years of rising dividends to its investors. For more on Alliance Trust and its strategy, please find out more here.
Marcus De Silva is a Freelance Investment Writer
1. https://www.bankofengland.co.uk/monetary-policy-report/2022/august-2022
3. https://www.imf.org/en/Publications/WEO/Issues/2022/07/26/world-economic-outlook-update-july-2022
4. AJ Bell – PRESS RELEASE – Laith Khalaf, head of investment analysis
The views expressed are the opinion of the Managers and are not intended as a forecast, a guarantee of future results, investment recommendations, or an offer to buy or sell any securities. The views expressed were current as at October 2022 and are subject to change. Past performance is not indicative of future results. A company’s fundamentals or earnings growth is no guarantee that its share price will increase. You should not assume that any investment is or will be profitable. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. TWIM is the appointed Alternative Investment Fund Manager of Alliance Trust plc. Alliance Trust plc is a listed UK investment trust and is not authorised and regulated by the Financial Conduct Authority.