How to invest if the recession comes? Lots of bonds, few shares: portfolios – Corriere.it

The 2023 match? It should be played defensively, favoring fixed income and waiting for the right moment to be able to raise the risk bar. On the future of the markets and macro prospects, Kate El-Hillow, chief investment officer of Russell Investments, raises some doubts: the economy could enter a recession and, in this case, the shares would discount a reality that has not yet been incorporated in the prices. After the increase in this first quarter, equity valuations are now at higher levels than expected. But our baseline scenario hasn’t changed, and we wouldn’t be surprised if the US, UK and Germany went into recession. Because of this, we see a potentially bearish equity market for the remainder of the year. A thesis also supported by the fact that in the coming quarters the profits of the companies will hardly continue to grow. In this context, the most profitable choice for the portfolio is the bond market, and more specifically government bonds. If we were to enter a period of recession, I would focus mainly on the US, where we see a U-turn from the Fed. The US central bank could cut interest rates, and that would be good for government bonds. And then, we must also consider that today the fixed income market offers a very attractive coupon yield, which we have not seen for 15 years.

The impact of the Fed

Looking at the central banks, the Fed has probably concluded the interest rate hike cycle (in its meeting at the beginning of May it raised rates by 0.25%, bringing them to 5-5.25%, ed), which generally indicates that bond yields have peaked, El-Hillow argues. Government bonds now offer an attractive yield and protect the portfolio from a potential recession. The advice, therefore, first of all favor government bonds and then give some space also to investment grade corporate bonds. The spreads are quite tight, but compared to the equity market they represent a valid alternative. In terms of asset allocation, however, the CIO of Russell Investments deems it more convenient to maintain a neutral approach, which guarantees a good level of liquidity: this ensures us a certain flexibility in adapting to any changes in the market – he points out -. Whether it’s a Fed turnaround or another event, the business cycle could change and it’s important to be ready to seize the opportunity to increase portfolio risk.

Do not reset actions

Make way for the bonds, therefore, without to completely reset the actions, where it is possible to find opportunities anyway. As in emerging markets and more particularly in China, which reopened the economy ahead of schedule, in December 2022 – El-Hillow points out -. In the coming months Beijing will continue to open up and other emerging developing markets will also benefit, which in terms of valuations are more attractive than developed markets. With regard to sectors, however, El-Hillow looks with interest at the healthcare sector and at technology, while he advises prudence on the banking sector and on the consumer discretionary sector. A potential recession, coupled with high inflation, could weigh on consumption more than we have seen so far. In any case, beyond the sectors, the right thing to do is evaluate the companies on a case-by-case basis. In the current market context it is certainly the best way to generate performance on a relative basis. Over a medium to long-term time horizon, compatibly with an adequate risk profile of investors, El-Hillow also sees interesting opportunities in private markets: private equity offers alternative investment opportunities and at convenient valuations compared to traditional listed equity markets. Another interesting asset class is private infrastructure, which can offer effective inflation protection, concludes El-Hillow.