A number of fund managers have said it is difficult to be sector specific when choosing which areas could benefit from the UK slipping into a recession, as Fidelity’s investment director warned moving into classic defensive areas is a risky manoeuvre.
Last week, the Bank of England brought the base rate down to a new low of 0.25 per cent, as it looked to stop the UK’s economic slowdown from worsening following the Brexit vote.
But investment experts have said it is difficult to predict the type and severity of the downturn, suggesting it is best to take a bottom-up approach when choosing where to invest if the UK does stay in negative growth territory.
Matthew Jennings, investment director at Fidelity International, said the classic stocks investors buy when they expect an economic downturn are tobacco, consumer staples, healthcare and utilities.
Moving into those classic defensive areas now is a risky manoeuvre. Matthew JenningsBut he said it is not as simple as buying certain sectors and waiting for the recession to come, because the market has been pricing-in a slowdown for some time.
Mr Jennings said the valuations of many of these defensive stocks are now at all time highs.
“Moving into those classic defensive areas now is a risky manoeuvre, because you will have to pay extremely high valuations for those stocks.”
He said there is a wide gap between these domestic cyclical companies and the more defensive companies which people have been crowding into, adding: “It’s a bit late to try to move into this defensive group of stocks.”
Hugh Yarrow, who co-manages the £934m Evenlode Income fund with Ben Peters, said some companies could become “quite interesting” if there is a recession, pointing to high quality businesses where the yield is not quite high enough for the fund to invest in at the moment.
“If a recession were to happen, then more domestically exposed business models are likely to underperform,” he explained, adding those companies that were weak after the referendum result are likely to be the obvious candidates in terms of continued underperformance.
“From our perspective, we like to invest in quality businesses when they are attractively valued, so when sectors become unfashionable then that can provide opportunities,” stated Mr Yarrow.
“But our approach means there are some big domestic sectors which we don’t have much exposure to, and we won’t even if they are cheap because of our focus on high returns and high capital.”
Mike Webb, chief executive of Rathbone Unit Trust Management, said a recession would probably suit his funds, because their UK equity exposure focuses on cash-generative businesses with a good margin of safety.
“That really is the only way you are able to protect investors capital,” he said, noting any recession is likely to be a short-lived anyway. “If there is a recession, multi-asset funds will become more popular because of their diversification and as they are outcome-orientated within risk targets.”
katherine.denham@ft.com
