A very particular set of equities can perform relatively well if recession happens, but they must be owned prior to the downturn starting, according to David Henry, investment manager at Quilter Cheviot.
Henry said: “A lot of scars remain from the Great Recession following the financial crisis nearly 15 years ago, but the regulations that came into place over subsequent years forcing banks to hold more capital, leave us far less likely to see a similar scene repeat.
“The financial system looks to be in a better place to weather the next slowdown. And it increasingly looks like one is coming. Rising prices and the very real impact on our day-to-day lives are starting to show up in the economic data. But drawing on what happened in 2007-08 and beyond, what can we as investors learn from history?"
As a starting point, Henry said bonds tended to do better than stocks during a recession.
"Not necessarily a surprise," he added. "When you are in the trenches, return of capital takes precedent over return on capital. So, should we just buy bonds instead of stocks? Sadly, it’s not that simple, as we have seen this year, and as ever, the key is timing.”
In terms of equity exposure he said investors needed to try to prioritise investing in companies which sold the goods and services that people desperately wanted, or ideally needed.
However, he noted that this is a tough job because it had been so long since the UK had been through a prolonged economic slowdown to test what consumers actually prioritised.
Henry added: "Companies have a real balance to strike at the moment. To what extent can they pass on rising costs to their consumers without seeing a fall in sales? Looking at my own monthly outgoings and the shift to spending on subscription type services is obvious. We are about to find out how sticky these subscriptions are, both at the consumer and corporate level."
"Nothing tests an investment thesis like a slowdown. Sustainability of earnings is a real area of focus at the moment. A business that can maintain earnings growth during the coming period will likely be disproportionately rewarded by the market. During the next twelve months or so it will become obvious which companies actually have a competitive advantage, and which were being swept along by an era of cheap money.”