Investing for a recession and a recovery

With the country coming to a grinding halt in March, UK GDP (a measure of the total value of goods produced and services provided in a given period) for the first three months of 2020 was predictably awful.

March alone saw the economy shrink by almost 6%*, and the data for April through July is expected to be substantially worse.

Piers Hillier, chief executive officer of Royal London Asset Management, said: “We always knew that these figures would be bad, and in some respects, it didn’t matter whether the economy shrank by 5%, 6% or 7% in March. The recovery from these blows is what matters. In this sense we are looking at how fast the economy can start moving again – not the absolute number, but the relative rate of change to give us a sense of how long it will take for the economy to normalise.”

Clearly the shape of the recovery is also subject to heavy conjecture. At first it was ‘V’ shaped, but we’re starting to hear about ‘U’, ‘W‘, and even ‘L’ shapes, as the lockdown continues.

Types of recession and recovery shapes explained

V shaped: As you’d expect given the shape, the economy suffers a sharp but brief period of economic decline with a clearly defined trough, followed by a strong recovery.

U shaped: This is where there is a longer period at the bottom where GDP may shrink for several quarters before recovering.

W shaped: This is what is known as a double-dip recession. The economy falls into recession, recovers with a short period of growth, then falls back into recession before finally recovering.

L-shaped: This is when an economy has a severe recession and does not see a return to growth for a number of years. This is when a recession can become a depression.

Diversification will be paramount

This recession is a self-induced recession and like no other we have experienced before. No one knows how deep it will go or how long it will last, so above all, diversification of investments will be paramount. In a volatile and uncertain environment, you don’t want to lose too much as and when the markets fall, but you don’t want to miss out on any rallies either.

Here are a few ways you can achieve that diversification:

Defensive options

For the defensive part of a portfolio, investors could opt for a long/short absolute return fund like Janus Henderson UK Absolute Return or BlackRock UK Absolute Alpha. They invest in UK equities, but can also make money from falling share prices. In the past couple of months, they have proven that they can limit losses when markets fall.

Hear how Smith & Williamson Enterprise fund used these shorting tools in February and March this year.

Alternatively, investment grade corporate bonds and even some carefully chosen high yield bonds are now looking quite attractive. Bond markets fell along with stock markets in March, but to a lesser extent. In a world where interest rates are now likely to be rock bottom for another decade, their increased yield may also be attractive for those perhaps looking to fill the income gap left by dividend cuts. Man GLG Strategic Bond and Nomura Global Dynamic Bond are two very versatile bond funds.

Search FundCalibre for Elite Rated bond funds

Physical gold is also an option as it tends to be the asset investors turn to in a flight to safety and can give some protection in both inflationary and deflationary environments. Merian Gold & Silver can invest in both physical gold and silver as well as gold and silver mining equities.

Offensive options

Technology companies have done well in this crisis as we have all had to do far more online. Believe it or not, such is their dominance, that at one point in April, the US Nasdaq index enjoyed a market capitalisation greater than all the developed markets outside America. Or to bring that example a little closer to home: Amazon and Alphabet combined were more highly capitalised than all the quoted British companies put together.

As James Thomson, manager of Rathbone Global Opportunities so nicely put it: from ‘working from home’ technologies, to ‘deliver to home’ food and purchases and ‘fun at home’ entertainment packages, we’ve relied on technology more than ever.

AXA Framlington Global Technology fund is an obvious choice here, but many more generalist funds also have large allocations to the sector like Schroder Oriental Income, which has a quarter** of the trust invested in tech stocks and Guinness Emerging Markets Equity Income, which has a 29.8%^ allocation.

This particular crisis is also all about healthcare – an area where there could be considerable investment over the next decade to make sure we are better prepared for future pandemics. In this space Polar Capital Global Healthcare Trust is an option, but again, many other funds also favour the sector, including Baillie Gifford Global Discovery which has 41.8%** invested in healthcare companies and T. Rowe Price European Smaller Companies Equity which has 21.3%^ in the sector.

Letting the professionals decide for you

If trying to combine all that is too much for investors, then they could let the professionals decide for them and opt for a multi-asset, multi-manager fund like Premier Multi Asset Growth & Income or Close Managed Income.

Search FundCalibre for Elite Rated multi-asset funds

*Source: Office for National Statistics
**Source: Fund factsheet, 31 March 2020
^Source: fund factsheet, 30 April 2020

The views of the author and any people interviewed are their own and do not constitute financial advice. However the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Before you make any investment decision make sure you’re comfortable and fully understand the risks. If you invest in fund or trust make sure you know what specific risks they’re exposed to. Past performance is not a reliable guide to future returns. Remember all investments can fall in value as well as rise, so you could make a loss.