Vantage Point: Investing in recessions  

'Investors should not forget the lessons of past crises'

'Investors should not forget the lessons of past crises'

The past year has been the worst for investing since 2008 and the new year will be filled with “old concerns”, a fund manager has said.

David Coombs, fund manager, Rathbone multi-asset portfolios, said 2022 has mainly been a period of unwinding of a decade and a half of zero interest rates and a realignment of risk premium markets, which are struggling to predict what the cost of capital will be in the next five years. 

“And with that questions have once again been raised about the sustainability of the 60/40 portfolio as a balanced, diversified strategy,” he said.

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But investors should not forget the lessons of past crises. 

The 60/40 split remains relevant as a risk budget, or a starting point, he said, but investing 40 per cent of a portfolio purely in bonds clearly has not been appropriate for some time. 

It has been proven in 2022 that it is not impossible for equities and bonds to be correlated.

Furthermore, he added, there has been huge volatility in interest rates for all kinds of bonds, from government bonds to high yield, which has really hurt balanced strategies.

“The dollar, behaving as it usually does as a safe haven asset, has probably been the only asset class that has provided returns for non-dollar investors."

View on 2023

Coombs said there may not necessarily be a new financial environment at the beginning of 2023.

“Because the new year is sure to be filled with old concerns when it comes to the investment world.”

The war in Ukraine, the as-yet unpredictable demand for energy and the the continuation of the rate hiking cycle (although this looks like it is coming to an end in the US), will all mean there is no quick return to “normal”.

“Some analysts may be expecting rate cuts in 2023, such a pivot is unlikely to happen until at least 2024…meanwhile, all the economic data, in the US, UK and Europe, are pointing to a downturn,” Coombs said.

“The next earnings season is going to be crucial because the forecast in the US is still relatively buoyant, which means there is room for disappointment if the recession turns out to be deeper.”

There is a big question mark hanging over companies’ guidance for the first quarter of 2023, which may give us more of an understanding of the shape and the longevity of recession in the US. 

“In my view, it will be a very volatile earnings season,” he said.

The UK’s specific set of issues, such as strike action and questions over the credibility of the Bank of England governor, means the risks are higher, with inflation looking slightly more structural. 

“Within fixed income, we think that UK inflation will remain higher than expected, around 4 per cent on average,” he said. 

“We are using this as the hurdle for entry into fixed income assets, searching for yield in corporate bonds above 4 per cent on a three-year annualised view,” Coombs added.