Investors should show caution when recession trading

Investors should show caution when recession trading

Recessions come with opportunities but investors should be cautious with "pivot trading", commentators have said.

Speaking on an RSMR panel this week (January 10), Alex Funk, chief investment officer at Schroder Investment Solutions, said equity markets are forward-looking, and may well be pricing in some of the recovery expected in 2024.

“Short-term volatility creates a lot of noise and trying to time [transactions] can lead to unhappiness,” he said.

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“[But] some of the best opportunities are often found within recessionary periods…[my advice is] to stay invested and look for those opportunities.”

The high inflation and rising interest rates seen in the last year have raised concerns that the global economy will tip into recession in 2023, with World Bank officials recently warning that the global economy is on a “razor’s edge”.

The UK in particular is facing a dreadful economic outlook, after a number of market-moving political decisions, such as the "mini" Budget and Brexit, have weakened the outlook for the country.

A poll of economists by the FT showed that the Covid and Ukraine war-induced inflationary shock will buffet the UK’s economy for longer than in other G7 countries. 

Eva Sun-Wei, fund manager at M&G Investments, said markets are desperate for the “pivot trade” where inflation levels begin to slow beneath market expectations.

“We need to be very careful [when] switching from the inflation to the recession narrative that quickly because I think markets have started to do that very aggressively,” she said.

“I do think inflation has peaked, I just think it is stickier than markets want it to be.”

However, for James Mahon, chief investment officer at Church House, this recession may not be as bad as those seen previously.

“Central banks have overtly said that they will keep pushing [interest rates up] until they tip economies into a recession.

“[But] this is a recession that starts when everyone has a job… it [therefore] looks as if it will be shallower than previous recessions.”