PERSONAL FINANCE Recession investing: how to steer a portfolio through a downturn

Recession investing: how to steer a portfolio through a downturn

Top tips for investing against a gloomier economic backdrop

The UK may already have entered a recession, with the economy slipping backwards by 0.2% in the third quarter of the year, according to the Office for National Statistics.

The Bank of England is now forecasting a prolonged period of weak or negative economic growth stretching through 2023 and 2024, though it must be said their estimates are built on market expectations for interest rate hikes.

The Bank signalled it thought the market was pricing in too many rate rises, so tighter monetary policy may not therefore slow the economy to the extent suggested by the Bank’s economic models.

WHY IT IS IMPORTANT TO STICK TO THE BASICS

But whatever the precise numbers turn out to be, it seems clear we are entering a period of poor economic conditions in the UK, and many investors will be wondering what they should be doing with their investments in response. If your portfolio is already in good shape, the answer is probably very little.

The importance of the basic principles of portfolio management is heightened in an economic downturn. Having a balanced and diversified portfolio is vital. Economic hardship puts pressure on businesses right across the market spectrum, and you never know precisely where the cracks are going to appear, so you shouldn’t have too much in any one stock, fund, industry or region.

You should also keep your portfolio manageable in terms of the number of funds and stocks you hold, so you can give each one the appropriate attention. Otherwise you won’t have time to fully digest news like profit warnings or assess manager performance.

HOW OFTEN SHOULD I REVIEW MY PORTFOLIO?

You should regularly review your portfolio, but don’t let this lead to over-trading. When markets are volatile and losses are mounting, it’s incredibly tempting to do something, just to feel some sense of control. Resist that temptation and only make changes based on reasoned considerations rather than on a gut reaction.

By constantly tinkering you’re likely to end up making mistakes, and racking up trading costs too. When times are tough you should also ensure that you bank the easy wins. That means making sure your portfolio is invested as tax efficiently as possible using SIPPs and ISAs, and ensuring that you’re keeping charges under wraps too.

It’s extremely important to recognise that an expectation of future economic conditions is already baked into share prices. Companies which are heavily exposed to under-pressure consumers such as retailers and travel stocks have already seen sharp falls this year, while defensive stocks like tobacco companies have had a much better ride.

The market is always looking ahead and though it might sound strange, now is probably a good time for investors to be anticipating better economic climes, rather than fretting about the current malaise. That doesn’t mean betting the whole farm on recovery, but it might be a good time to start thinking about drip feeding money into the market, ideally through a regular investment plan.

WHAT ABOUT DIVIDENDS?

Investors should also pay some attention to dividends. When growth is thin on the ground, dividends can keep your investment scoreboard ticking over. Poor economic conditions aren’t great for profits and hence shareholder payouts, but many companies used the shock of the pandemic to cut their dividends and reset them to much more affordable levels.

Dividend cover for the FTSE 100 currently sits at 2.36, according to the AJ Bell Dividend Dashboard, the highest level in a decade. That means company profits are more than double the amount of dividends being distributed, giving companies a large buffer before they need to start thinking about cutting back on these payouts.

WHY SOME COMPANIES CAN BUCK THE NEGATIVE TREND

While the UK recession is forecast to be long, it’s also expected to be shallow, so companies will be trading into an economy that is going down a slight slope, rather than plunging off the edge of a cliff.

That still gives good companies the ability to grow. Investors should also take note that their investments are likely only partly in thrall to the UK economy, with many funds and indeed companies on the London Stock Exchange deriving lots of their earnings from overseas.

And finally, recessions are part of the economic cycle, and if you’re investing for the long term, you have to expect to encounter them. While this can be painful for your portfolio, the upswing in share prices when recovery comes knocking can be swift and powerful, and if you’re not invested when this happens, you could be taking the rough without the smooth.

DISCLAIMER: AJ Bell owns Shares magazine. The editor of this article Tom Sieber owns shares in AJ Bell

By Laith Khalaf AJ Bell Head of Investment Analysis

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Asset Value Investors (AVI) has managed the c.£1.1bn* AVI Global Trust (the “Trust”) since 1985. The strategy over that period has been to buy quality companies held through unconventional structures and trading at a discount to estimated underlying net asset value; the strategy is global in scope, and we believe that attractive risk-adjusted returns can be earned through detailed research with a long-term mind-set.

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*As at 31 October 2022 AVI-Global-Trust