Copy article

Which? Magazine: Investing in a recession

Journalist: Sarah Davidson, Freelance

ended 04. November 2022

I’m pulling together a feature for Which? for their January issue and have to file end of this week.

Do please just answer the bits relevant for you.

The Bank of England said today we’re in for a rough ride and recession for the next two years. What does this mean for investors in practice? 

  • How do you assess risk in a market facing such uncertainty – fiscal policy, hawkish monetary policy, inflation, geopolitics? What is high risk in this context? And how should investors approach their own attitude to risk?
  • Time in the market, little and often etc – same rules apply for younger savers but what about those heading for retirement?
  • Diversification – any defensives fit for the future? 
  • Is it too late to buy into traditional safe havens like gold? 
  • What are the traditional sectors / asset classes that do well in a downturn?
  • What role should cash play in your portfolio over the coming 12 months?  
  • Should you be rebalancing now amid such volatility? What’s the best way to do this without crystallising losses?
  • Where are the growth opportunities in today’s economy and over the next two years? 
  • Where should income seekers be looking? 
  • How should investors be squaring dividend returns and social/environmental considerations? What’s more important? Can you do both? 
  • Should investors be on guard against scams? What to watch out for as we go into recession?

 

ARE YOU BEING WELL ADVISED?

 

How well is your IFA managing your savings? What to look out for?

What three questions should you ask your adviser now…?

 

PROTECTING INHERITANCE

 

How does recession affect your investment strategy when IHT planning? 

Are there ways to protect wealth and preserve it to pass on to family? 

Should older investors be passing on cash to beneficiaries now rather than waiting to leave it as part of their estate? 

 

COMMERCIAL PROPERTY

 

I’d quite like to do a box looking at property in a bit more depth – are we heading for a commercial property crash? Or are investors over-cautious on affordability in the commercial property sector? How has the underlying asset mix shifted over the past 15 years when you look at these funds/trusts? Is the knee jerk just that? Role of warehousing, storage, data centres, infrastructure  etc versus retail and more traditional  commercial property assets……If you like property what should you be looking for in a fund? What’s a sensible allocation? 

 

SAFE HAVENS

 

Gold – worth it? What’s the best way to get exposure?

Cash – is it as safe as it sounds? Inflation outlook and rising savings rates…what’s the tipping point? 

Bonds – they’ve traditionally been thought of as safe and then the mini budget happened. Should investors disregard that as a macro event? Should we still be investing in them? 

 

ECONOMIC FAULT LINES

 

Where are the danger zones heading into a recession? Retail banks? Residential property? Insurers? Alternative asset classes?

 

AND…..FUNDS YOU LIKE

 

One or two funds you think offer good value and opportunity in a downturn, with a bit of info on why. Please include ongoing charges.

8 responses from the Newspage community

Copy all

Copy

Editor
Samuel Mather-Holgate
Independent Financial Adviser at Mather and Murray Financial
Investing in a recession is a huge opportunity. Markets are forward looking so price in what is the most likely outcome, therefore the price of the recession on companies is already in their current market price. Of course, if the recession is worse than predicted then they could still go down further, but generally these types of investments are for long term objectives so that shouldn't matter too much. Be happy in the knowledge you are buying at a discount from their peak. Even during the recession you should start to see growth when the light at the end of the tunnel becomes visible. It's really important to build a diversified portfolio and one that matches your attitude to investment risk. In general, bonds (loans to either companies or governments) and equities (stocks and shares) will make up the most of your portfolio but the weighting is different the more risk you take in order to potentially generate better returns. The higher the risk the more you will have in equities. You may also have property, commodities and cash in your portfolio. Once your asset mix is decided you will want to look at geographic regions and sectors. Your equity exposure should have funds specifically investing in areas such as the UK, USA, Europe, Asia and emerging markets. Again, depending on your risk you may want to weight these areas differently. Emerging markets have had a really tough time of late but that is an opportunity to buy in with the prospect of stellar growth once China opens up from Covid. Increasing the weighting towards emerging markets would mean mean your investment risk increases though and expect to see higher volatility. You can buy commodity funds that have a mix or a specific asset. Exchange traded funds (ETFs) track a specific index and you can buy a Gold ETF that mirrors the spot price of gold. Traditionally the has been a good investment in uncertain times and gold is yet to soar as the US dollar is so high. When recession takes hold the the Federal Reserve are forces to cut interest rates gold should benefit. Cash is the only sure way to loose money when inflation is high because no savings account can increase your money by the cost of living. You should keep back what you need for any capital expenses and also an energy fund, but invest the rest wisely in other assets. If you want income, invest in UK equity income fund. If you want growth invest in emerging markets. If you want cautious growth invest in global government bonds as they have been hit hard by inflation and will start to perform better when inflation begins to tail off. When speaking with an IFA they should thoroughly go through your objective for your money. They should question you over what level of risk you are willing to take; they may use a questionnaire but should go beyond this so you really understand how your investment works. Social and environmental concerns should be discussed and they will be able to construct a portfolio free of certain companies that might invest in things you don't agree with. Inheritance tax planning is a complex issue and one that takes careful planning and the sooner you start the easier it is. Wills, trusts and government tax allowances can be used to mitigate the tax you pay. There are also certain types of investment that give 'business property relief' that means they are taxed at 0% for inheritance tax after you have held them for 2 years. These do typically tend to be much more risky, but you have to factor in the 40% saving when weighing up whether the risk is worth it. Real estate investment trusts (REITs) have had a dreadful year. The crash in the commercial property market has already happened and many investment experts think we are thought the worst of it. I would avoid these for the next 6 months until we know how sharp the recession might be because there could be substantially more downside with these trusts. I have three favourite funds at the moment. Fundsmith Equity Fund, managed by Terry Smith, has an excellent track record and Smith is one of few managers who regularly outperforms the market and his benchmarks. This is a global equity fund that invests in quality companies no matter their location. Scottish Mortgage Trust is another global equity investment. It has a higher degree of exposure to technology and, for that reason, has taken a massive hit losing 50% of it's value in the last 6 months. The track record is excellent and the companies are quality so I expect to see a quick, sharp rebound. For a bit more risk, the Vietnam Opportunity Fund is a play on a specific emerging market. When China opens up this fund should fly. Vietnam is really well placed to take advantage of a growing manufacturing sector as well as higher domestic consumption.
Copy

Adrian Kidd
Chartered Wealth Manager at EQ Financial Planning
Right now its about the capacity and willingness to take risk. You need to have a reasonable level of savings and income in place before investing any new capital. You need to be able to commit to holding investments for at least 5 years and if you can do these things, I feel that you will be rewarded for your patience. There is always noise with markets and commentators but if you think things through properly, now is a great time to invest, despite what everybody is saying. If you are heading into retirement, lets say 2 years away, you should be thinking about your plans with your current savings via pensions, ISA's and cash. If you are looking at buying an annuity, then you shouldn't be invested at all and you'll be buying at rates we haven't seen since 2008. If you are staying invested via a drawdown plan, make sure you are in a well-diversified portfolio and that you fixed income or defensive assets held, are exactly that; super defensive. And if you are looking at drawdown then get advised on safe withdrawal rates and capital [protection strategies as 99% of people cannot manage this themselves. Gold, a traditional safe haven has really under-performed so adding some now may be of value as the dollar should weaken at some point. Other commodities have taken a hit and usually are good in an inflationary environment but I would not expose more than 10% of a portfolio to this asset class. ESG tends to be a growth story so its difficult to marry up income strategies here. For income seekers, you can and should be looking at investment trusts and even the FTSE 100 offers a decent yield (not for your ESG clients). Once signals are a little clearer I will be adding small and mid-caps back to my portfolios and also more traditional fixed income with more duration. If your portfolio has had duration of more than 1-2 years, you've been crushed this year on your defensive assets so I'd be asking your adviser questions if they've held gilt funds or any government bond funds. Same goes for small and mid-cap equities as these are usually more affected by recessions than bigger companies as they are highly correlated with their respective economies. 3 questions for your adviser 1) whats the duration of my fixed income section of my portfolio and what is the quality of the bonds I hold. Is there much high yield/junk in my funds? 2) value equities vs growth equities - how am I positioned? 3) how does my lifetime cash flow look now and will I still be ok? Commercial property Outlook is murky but if you are in the right areas (not office space) then longer-term it can pay off and its cheaper entry point than a year ago. Again, from a diversification perspective its a good option to have but the issue for me is always liquidity risk. Maybe looking at some investment trusts and check the gearing of the fund you are looking at. Although riskier to hold the equity rather than a traditional bricks and mortar fund, at least you won't be subjected to being gated. I feel most people have enough property exposure via their homes and BTL's so there is an argument that you don't need any further domestic property market exposure. 2 funds that I have within my models in the equity and fixed income space to look at are: Vanguard FTSE UK Equity Income -0.14% ongoing charge Good yield and exposure to value stocks and good dividend payers which is what is required for this environment Jupiter Strategic Absolute Return Bond fund F2 Hedged -0.65% ongoing charge. An alternative bond fund that has proven to show it can work in a raising rates environment. Most bond fund are down 15% YTD but this fund is positive. As always, review funds quarterly to amke sure they fit the ever chaging landsacpe !
Copy

Dorian Payne
Managing Director at Castell Group
Investment is all about time in the market rather than timing the market. That being said, it's important to try and not buy at the high if the signs are indicating an impending drop in price. Equally, it's important the investments cashflow, especially when taking on debt. It's ok to take a long term view and expect a lower return in this period of high interest rates, but ensure this is stressed against the entire investment portfolio. A balanced portfolio of risk, medium and low investments is essential. The actual split is dependent upon individual risk appetite. There could be a great opportunity for commercial investment, especially if there is asset management involved (for the active investors). For example, securing a commercial property based on vacant possession value but having done some background work to line up a good tenant with a strong lease, could result in an investment yield revaluation and may be substantially higher. We need to remember that even in recessions, there are certain business sectors that thrive and grow. It may be worth trying to target investments surrounding those sectors.
Copy

Alex Shairp
Director at Blackmount Private Wealth Limited
Anyone heading towards retirement should be pragmatic. This is true now more than ever because frightening headlines and unrest naturally affect human behaviour. The approach to retirement calls for a gear shift within your investment strategy regardless of market volatility or economic downturns. Your overarching objectives are moving away from growth at all costs and focussing on the need to provide income or funds that are easily accessible for spending. This calls for a balance between what you need in the short-term versus the longer-term. Bear in mind someone retiring at state pension age is expected to live another 20 years on average. Keep saving what you can and start planning now. Speak to a financial adviser who can model your finances over the duration of your retirement. They should explore various scenarios which account for sensible assumptions about inflation, demonstrate the impact of investment losses, and relate to your personal plans and concerns. Doing this means you can decide where to invest, how to invest, when to retire, and how much you can afford to live on. That should help you get some valuable sleep at night. A good financial adviser will focus on matching your savings and investment strategy with your specific personal circumstances and objectives. Be wary of an adviser who wants to talk about hot new products or star fund managers before understanding how that solves your problems. As there is a lot of uncertainty in the world now, your financial adviser should be in regular contact to provide information and answer any questions or concerns you have. Now is the time to ask your adviser: 1. Are my financial plans still on track? If not, what can we do to fix this? 2. Am I getting the best value for money from my financial arrangements? 3. Has my portfolio performed as expected in recent market conditions? If not, why?
Copy

Ashley Thomas
Director at Magni Finance
Commercial property is risky at the moment as it is likely this will reduce the most in the property market. A lot of companies are downsizing since Covid as the perception for working from home has changed. However, where there is risk, there is potential for reward. If you can invest in commercial property at a significant discount, there is still a lot of potential for the value to continue to incease in the long term.
Copy

Alastair Hoyne
CEO, Finanze Capital at Finanze Capital
We don't expect a commercial property price crash but instead a correction to take place before the end of the year because of negative capital value growth brought about by the conflinct in Ukraine, higher energy prices and an overall dampened economic outlook. This is exacerbated by the reduced footfall in retail centres and the high office vacancy rates because of work-from-home trends. A restoration of consumer confidence could bring transactions back to pre-pandemic levels of activity, but this isn’t possible in the short run since household budgets are further pressured by inflation, and businesses are battered by higher input prices and Hunt’s announcement of scrapping the VAT-free shopping program for tourists in the country. On the other hand, the discounted property deals present huge opportunities for bargain hunters who are ready to compete with others through all-cash offers. The winners will emerge mostly from overseas buyers of commercial real estate who can command full cash payments.
Copy

Joshua Gerstler
Chartered Financial Planner at The Orchard Practice
"If you are investing for the long-term, then although you might feel uncomfortable during the roller coaster ride of investing, the journey is irrelevant. It is the destination that is important. Take a step back from the panic and ask yourself what is important. Is it whether your portfolio is up or down 2% today, or is it whether it will provide enough money for you for when you need it in the future. Will it enable you to live the life you want to live? Will it enable you to create multi-generational wealth and a legacy for you and your future? We will create financial plans for those we look after with a multi decade time horizon which we are confident will stand the test of time."
Copy

Daniel Jones
Lifestyle Financial Planner at DGS Chartered Financial Planners
One thing that's important to remember is that volatility is not risk. The biggest risk to a comfortable, multi decade, retirement is not being invested in equities, i.e the great companies of the world. The biggest risk to your long term outcome is inflation. Like carbon monoxide, inflation is the silent killer of your wealth. People holding their money in cash don't visibly see it reducing in value, but it's purchasing power is being eroded away by inflation. If a client is close to retirement, and is planning to use flexible drawdown within their pension, then they could still be looking at a 20 to 30 year investment horizon. As such, time in the market would very much still apply, as would maintaining a strong allocation to equities. Three questions to ask your IFA... 1. How much is enough? How much is enough to be able to live the life you want today, and the life you want tomorrow, without fear of running out of money, no matter what happens. A good IFA should be showing you, year on year, your cashflow forecast which, based on certain assumptions, can help to answer this vital question. 2. Am I going to run out of money, before I run out of time? Or am I going to run out of time, before I run out of money? Neither are optimal outcomes! 3. What are you doing for my ongoing fee? If answering the questions posed in 1 and 2 above is not being done at each annual review meeting, if your IFA has not provided you with a written financial plan outlining the above and showing exactly what you need to be doing to achieve the future lifestyle you desire, then I would suggest not enough is the answer. Older investors, who have been clearly shown that they're far more likely to run out of time before they run out of money, should consider helping their children, grandchildren, or whoever their chosen beneficiaries may be, by gifting to their beneficiaries within their lifetime. Not only can this help to reduce any future inheritance tax liabilities, but you can get to see the reward of helping those you'd wish to inherit your wealth whilst you are still alive. Surely it is better to give with a warm hand, rather than a cold heart! Cash - Cash is far from the safe haven many perceive it to be. In fact, by holding too much money in cash, you significantly increase your risk of a poorer lifestyle in the future. Whilst, unlike investing in equities, you do not have the volatility of seeing the value of your money moving up and down, the real purchasing power of your money is being silently eroded by inflation. You might think getting 3% interest in cash savings is ok, but when inflation is 10% that's a 7% loss in real terms. You just don't visibly see that loss on your bank statement. Everybody should have what's known as an emergency fund held in cash, often around 6 months salary as a general rule, and any known short term expenditures, say within the next 5 years, are sensible to hold in cash too. Anything outside of this should be invested in equities with a longer term view. This gives you the best possible chance of growing your money over and above inflation and, as such, giving yourself a more prosperous, more comfortable, financial future.