How To Invest In A Recession – Forbes Advisor UK

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The Bank of England has forecast that the UK is likely to enter a recession by the end of the year, as it continues to hike interest rates to combat soaring inflation.

But what is a recession, and what can you, as an investor, do to protect your portfolio?

A negative economic outlook can take its toll on the performance of stocks and shares, and global markets have been jittery for several months. 

Since the start of 2022, for example, the FTSE 100 index of the UK’s leading shares is down by around 4%. It’s a similar story in the US, where the S&P 500 stock index is at its lowest level in nearly two years.  

To help UK investors protect their holdings from market turbulence, we’ve asked investment experts how best to position a portfolio to help weather tough economic conditions.

Remember: all investment is speculative and your capital is at risk. You may lose some or all of your money.

What is a recession?

During times of economic growth, a country’s Gross Domestic Product (GDP) – the total value of goods and services produced – will increase. However, if its GDP falls for two consecutive quarters, it’s defined as being in recession.

Recessions form part of the natural economic cycle of expansion and contraction. The UK previously entered a recession from 2008 to 2009 after the global financial crisis, and again in 2020 due to the pandemic. 

Jason Hollands, managing director of Bestinvest, says: “There can be different types of recessions, but the one we are almost certainly entering will be caused by falling real incomes as high inflation hits people’s pockets, exacerbated by rising borrowing costs, with higher taxes adding to the pain.

“Over 60% of UK GDP is related to consumption, so the UK economy is very susceptible to household finances being squeezed. Inflation, higher interest rates and higher taxes are a perfect storm.”

Five tips for investing in a recession

Investment experts from Chelsea Financial Services, Bestinvest and Hargreaves Lansdown offered the following advice on how best to position a portfolio against the potential damage from a recessionary storm.

  1. Diversify your portfolio

Diversification across a range of assets such as equities, property, bonds and commodities, as well as different sectors for equity investments, is useful because it can smooth an investor’s average returns if one or more particular asset classes or sectors underperform.

Darius McDermott, managing director of Chelsea Financial Services, says: “Recessions are all part of the regular economic cycle. For long term investors, the hope is that you already have a diversified portfolio going into a recession.

“You can do some things to mitigate the risks. You can invest on a monthly basis or buy on the dips rather than committing a lump sum to the market in one go, and invest in a range of assets all around the world as different economies will have different experiences – some better and some worse.”

  1. Consider UK shares

Bestinvest’s Mr Hollands says markets always try to second-guess the future rather than wait for confirmation: “So, to a significant extent, recessions have been factored into equity valuations already.

“The UK market is incredibly cheap now, with the FTSE 100 trading at around 8.7 times estimated 12-month earnings, a significant discount to the longer-term average of around 12 times.”.

This ‘forward’ price-earnings ratio measures the average price investors are willing to pay for FTSE 100 shares relative to their forecast earnings, or profits. Therefore, a reduction in the price-earnings ratio may indicate that shares are under-valued relative to their earnings potential.

Derren Nathan, head of equity research at Hargreaves Lansdown, picks out packaging producer DS Smith and pharma giant GSK as UK shares that could perform well in volatile markets: “DS Smith is exposed to growth drivers that are linked to more than just broader economic growth, such as the shift towards more sustainable packaging along with the growth potential in online retail. 

“Following the spin-off of its consumer health arm Haleon, GSK now offers a purer exposure to specialty medicines, which command premium prices.

“We see healthcare as relatively defensive in the current environment, and not massively dependent on consumer spending power.”

  1. Increase exposure to ‘defensive’ sectors

Businesses in defensive sectors – consumer staples such as food, drink and personal care products, financial services and utilities – tend to be less vulnerable to falling demand during a recession.

Mr Hollands says: “More resilient parts of the market also include non-cyclical businesses, such as defence and healthcare, which are heavily exposed to government spending and, in the case of defence, which has a multi-year order book.”

For investors looking to access a ready-made portfolio of companies in more defensive sectors, Mr McDemott picks out Polar Capital Global Insurance and Polar Capital Global Healthcare Trust.

Mr Hollands highlights Liontrust UK Growth and TB Evenlode Income as options.

  1. Reduce exposure to cyclical sectors

Investors may also want to consider reducing their exposure to businesses selling non-staple ‘discretionary’ products, which are likely to be hit by the current cost-of-living crisis.

Mr Hollands comments: “Vulnerable sectors include consumer discretionary stocks, including auto manufacturers, airlines, non-essential retailers, and also the property sector, which is looking at the steepest contraction over the next two years since the early 1990s, with declines of 10-20% being forecast”.

  1. Focus on experienced fund managers

Hal Cook, senior investment analyst at Hargreaves Lansdown, says: “One of the things we look for in funds are managers with lots of experience and time in the industry because we want to invest with people who have been through market cycles and experienced different economic conditions and monetary policies that can impact future investment returns.”

As an example, Mr Cook points to Stuart Edwards, manager of the Invesco Tactical Bond fund, and Jonathan Platt, manager of the Royal London Corporate Bond fund. Both have over 35 years’ experience.

What are the ‘safest’ investments in a recession? 

Investors may seek to focus on protecting their capital in a recession by investing in cash and bonds, rather than looking for returns on higher-risk equities.

Mr Cook says: “Cash can’t go down in value in absolute terms. But in the current inflationary environment, you are losing value in real terms by holding cash.”

Looking at other assets, Mr Dermott says: “Bonds have suffered as interest rates have risen. But arguably the time is close when government bonds – especially UK and US ones – could become a safe haven asset again. 

“Yields have already risen considerably, and once central banks stop raising rates, or even cut due to a recession, then the price of bonds will rise.”

Mr Cook also highlights the potential advantages of investing in gold: “Gold has long been considered a store of value: there is limited supply which means it theoretically has a minimum value and it is unlikely to go to zero. 

“Again, the safe haven argument has held historically here with investors often selling risky assets and moving into gold.”

How can investors make money in a recession?

Mr McDermott points to stock markets working in advance of the economic situation, meaning that they fall as a recession approaches but usually recover first: “Once things stop getting worse, stock markets are likely to rally and at this time, historically, smaller companies have done well. 

“Here we like Janus Henderson European Smaller Companies, TB Amati UK Listed Smaller Companies, Artemis US Smaller Companies and abrdn Global Smaller Companies.”

Hargreaves Lansdown’s Mr Cook says: “Typically it isn’t really about making money during the recession itself, but more about positioning yourself to make money as the recession fades.”

He suggests investors maintain a long-term investment horizon. He says that, while it’s tempting to try to time the market and swap from safer assets to equities as the economy improves, in reality, this is difficult to achieve. 

He therefore suggests investing in fund managers that will oversee allocation decisions for their investors. 



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