In the midst of a trade war between the the US and China, and with the looming uncertainty over Brexit negotiations, traders and investors have started mentioning the ‘R’ word again.
Data from Debtwire (Sylvia Amaro, CNBC, 15 Feb, 2018) showed that 56% of private equity executives and 57% of distressed debt investors expect a recession before the year 2021. Prominent investors like Ray Dalio and professor Nouriel Roubini (the Guardian, 13 September, 2018) have voiced concerns that the world, and the US in particular, is now due a recession.
The inversion of the US treasury yield curve last week alarmed investors who consider it an important indicator of an oncoming recession. The inversion of the 5-year and 3-year Treasury note has now turned the market’s attention to the 2-year and 10-year notes. The inversion of the latter pair has preceded every US recession since the Second World War (Dion Rabouin, Yahoo Finance, May 24, 2018).
As one of America’s biggest trading partners, the UK should be concerned about these recent developments. A global recession could have an immediate impact on the stock market and a lasting impact on the living standards across the country.
What can investors do to prepare for a financial catastrophe? Some institutional investors believe buying short term government bonds may be the best way to hedge against a downturn in the wider economy. Singapore-based Kamet Capital Partners Pte, a multi-family office with a number of wealthy Chinese investors, bought the 2-year US treasury notes recently as part of a bet that a downturn will hit within the next year (Chanyaporn Chanjaroen and Ruth Carson, Bloomberg, December 11, 2018).
However, David Kelly, chief global strategist at JP Morgan Asset Management, believes investors shouldn’t ditch stocks even if a recession is due soon (Bernice Napach, Think Advisor, July 06, 2018). Kelly believes investors should focus on a value investing strategy when the economy turns for the worse. Stocks that are already deeply undervalued tend to retain their price when the market sentiment turns from optimistic to pessimistic. He also recommends international diversification, saying the correlation between international stocks is lower and emerging markets could also offer better growth opportunities when UK and US stocks plummet.
It’s important to note that traders and economists get these predictions wrong all the time. No one indicator or academic can accurately predict a recession. However, staying vigilant, diversifying investments and seeking out value is never a bad idea for investors.
The value of investments and income from them may go down as well as up and you may not get back the original amount invested.