Multi-asset investors urged against knee-jerk reaction to recession fears

In 2019 the US yield curve has inverted for the first time in over 10 years. Given that yield curve inversions have preceded the last seven recessions, market participants are speculating whether the countdown to the next recession has begun, a note from Investec Asset Management has said.

Additionally, The Share Centre noted the fall in industrial output from China and growing fears regarding the economic health of European "powerhouse" Germany.

Added to that, is the ongoing trade war between America and China, while back in the UK there is Brexit and news of a small rise in inflation last month, led to questions being raised about the future direction of interest rates.

If you think the UK might go into a recession, having most of your wealth in UK assets is probably not a great idea because if that happens.Carl Melvin

Carl Melvin  managing director at Affluent Financial Planning said, while investors will be looking for safer havens in light of the negativity surrounding the global economy and markets, he stressed they should not second guess the market with a knee-jerk reaction.

Mr Melvin said: “If you establish the strategy for your portfolio, it should be for the long term, not for a year or two, so why start changing it if it is the right strategy for the long term.”

As a result he believes that a multi-asset strategy can help investment portfolios at a time of economical uncertainty.

During the latter stages of a cycle and in recessionary environments the differentiation in the behaviour and performance of assets is at its greatest.Jason Borbora

He added: “If you think the UK might go into a recession, having most of your wealth in UK assets is probably not a great idea because if that happens, everything will go down in value, but if you have a global portfolio; if something goes down somewhere else it will go up.

“If you have a global multi-asset multi-manager portfolio, you might find your non UK assets might bounce up as a result of Sterling’s problems.” 

Echoing his thoughts Jason Borbora, co manager of the Investec Diversified Income fund said, that an approach which can understand the true underlying behaviour of securities and select between them is “crucially” important.

He added: “During the latter stages of a cycle and in recessionary environments the differentiation in the behaviour and performance of assets is at its greatest.” 

Craig Brown, Investment Specialist at Rathbones said when a manager running a multi-asset fund expects a recession then one would typically expect to see an increased allocation to assets which will remain liquid and are likely to have a negative correlation with equities in stressed markets.

Mr Brown added: "Typically, government bonds are a good source of protection for a portfolio, but we need to be cognisant of cost and establish whether there are actually more efficient and cost effective ways of protecting portfolios if the price of government bonds is too high

"Adding assets that have low correlation to equities over the long-term can also provide support in more troubled times, but some may be less liquid." 

"Gold is an example of something we believe can help manage risk within portfolios and can provide particular support when geopolitical tensions rise and, contrary to many opinions, when we experience deflationary environments, rather than inflationary."

But investors have been urged not to see multi-asset investing as the silver bullet that will always give positive returns in a down market.

Nathan Long, senior analyst at Hargreaves Lansdown pointed to 2008 when multi-asset investments held up better than some other investment strategies in the wake of the financial crisis

But he added: “You’d expect it to shelter better but to think you would be immune is wrong. The thought that we are going to be able to shelter investors from any drop in the stock market is false. You are still going to get sizeable drops for individuals.”

This is why investors should be more long-term in their approach, he added. They should also consider when they need the money because it might benefit them more to sell out to cash.

Mr Brown said, that there is no "silver bullet" for protecting portfolios from all risks. He added:"Therefore we believe a key part of risk management is building in a range of assets that all provide protection against a range of potential risks."