What does recession mean for your portfolio?

Kondi Nkosi, Country Head at Schroders South Africa

With the US economy looking more resilient than many had anticipated, the recent turmoil in the banking sector has added fuel to the debate on whether there is going to be a soft landing or a recession.

We’re on the side of the latter and still expect a recession is going to happen this year given the sheer pace of policy tightening by the Federal Reserve (Fed).

With this in mind, how should investors position their portfolios to seek shelter from the impending recessionary storm? Although every recession is unique and there is no guarantee that history is to be repeated, it is useful to understand how different asset classes have behaved during past downturns.

Recessions can be defined by two consecutive quarters of negative real GDP growth or in terms of the economic cycle, but here we simply look at US recessions officially dated by the NBER (National Bureau of Economic Research).

Safety first - but don’t miss the re-rating in the market

Recessions are often characterised by a slump in growth and a fall in inflation, which spurs policymakers to ease monetary or fiscal policy, or often both. Investors have typically sought the safety of government bonds and to some extent corporate bonds (chart 1). The US dollar has also benefitted from its perceived safe-haven status during recessions, particularly when the rest of the world has been weaker than the US economy . In comparison, equities and commodities get hit hard by the collapse in economic activity.

More generally, the performance of risk assets has been even worse during recessions over the last 30 years due to the heavy losses incurred during the Global Financial Crisis.

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