As debates continue over the likelihood of a recession, investment experts discuss what recession means for an investor’s portfolio.

With the US economy looking more resilient than many had anticipated, the recent turmoil in the banking sector has added fuel to the debate on whether there is going to be a soft landing or a recession.

“We’re on the side of the latter and still expect a recession will happen this year, given the sheer pace of policy tightening by the Federal Reserve,” Schroders strategist Tina Fong said in a statement.

With this in mind, how should investors position their portfolios to seek shelter from the impending recessionary storm? Although every recession is unique and there is no guarantee that history is to be repeated, it is useful to understand how different asset classes have behaved during past downturns.

Recessions can be defined by two consecutive quarters of negative real GDP growth or in terms of the economic cycle.  But Fong looks at US recessions officially dated by the National Bureau of Economic Research.

Portfolio
“Government bonds and to some extent credit bonds have typically done well during recessions, while commodity and equity prices have been hit hard,” she said.  “Defensive equity sectors and styles have also been performance winners. But investors should be mindful of missing out on the rebound of the stock market and certain equity styles and sectors towards the end of the recession,” she continued.

“With the Fed easing policy during economic downturns, this eventually lifts expectations of a recovery in the economy and corporate earnings,” she said.

“Commodities, particularly industrial metals and energy, have generally done poorly during past recessions. But gold has benefited from safe-haven flows. That said, this lesson from history does not consider the impact of China, which is expected to grow strongly this year. So, the recession playbook for commodities could be different this time around,” she added.

While there is no guarantee on the timing of the recession, she expects this to occur during the second half of this year. “This would likely set the stage for investors to naturally seek defensive assets first when investing in the initial months of the recession. But they should not ignore the pocket of opportunities that emerge as the market re-rates and prepares to move to the next phase of the cycle,” she continued.   

Rajiv Jain, chairman and chief investment officer at GQG Partners believes that there are at least two levers to pull that may help to prepare a portfolio for a potential economic recession. “First, we can rotate from names in certain pro-cyclical sectors including consumer discretionary and technology to companies operating in more defensive areas such as consumer staples, utilities and healthcare,” he said.

“Secondly, we focus on high-quality businesses, regardless of their sector classification, which we believe are well-positioned to thrive in recessionary environments. These companies are typically characterised by profitability, brand loyalty and strong balance sheets. During recessions, their financial flexibility affords them the opportunity to maintain their research and development budgets to innovate new products and increase their advertising to gain market share,” he added. 

Jupiter head of strategy for value equities, Ben Whitmore, doesn’t try to predict economic expansions of contractions. “The crucial thing we believe is to ensure the business has a balance sheet to protect against unforeseen events. These can range from a recession to Covid.  If the balance sheet is strong a company can absorb setbacks and recover. A weak balance sheet necessitates fresh equity capital and/or cutting back on the business. Both of these are damaging to the long-term health of the business,” he said.

CT Fitzpatrick, founder, chief investment officer and portfolio manager at Vulcan Value Partners focuses on investing in businesses with durable, identifiable competitive advantages which generally enables them to produce free cash flow, without a lot of leverage, in almost any environment including a period of recession.

“Our intrinsic value estimates may grow more slowly during a recession, but they should remain stable,” he said. “Our companies may even emerge more competitively entrenched through a downturn because they tend to have a strong connection with their customer, deep financial resources, and management teams who allocate capital well while their competitors often are not so fortunate,” he added.