A recession in the United States is inevitable and investors should focus on quality securities, limit exposure to real estate and consider increasing duration exposure in fixed income portfolios, according to a global investment firm.
American Century Investments chief investment officer Victor Zhang warned the recent banking crisis in the US, combined with a period of record inflation and rising interest rates, is accelerating a path towards recession.
“Tighter financial conditions and interest rates, in response to elevated inflation and banking industry turmoil, is and will continue to take a toll on consumer spending, credit creation, corporate earnings and investor sentiment,” Zhang said.
“The compounded effects of nine consecutive Federal Reserve rate hikes, raging inflation, supply chain disruptions and soaring interest rates will thwart growth.
“Accordingly, we believe these factors make recession the most likely economic outcome in coming months.
Although there are indications inflation is declining, he is predicting it will still surpass 3 per cent and gross domestic product may also contract.
While a recession may cause lower Treasury yields and wider credit spreads, he suggested investors could reduce their exposure and minimise potential risk by considering fixed income portfolios with longer duration and higher credit-quality strategies.
“Given that outlook, investors would do well to consider increasing duration exposure in fixed income portfolios as bonds and strategies with longer durations may offer performance advantages as rates decline,” he said.
“Inflation-protection and higher credit-quality strategies appear attractive as well. As the economy gets weaker and corporate earnings deteriorate, credit selection is critical in avoiding fundamentally poor, overly recession-sensitive issuers.”
According to Zhang, in times of economic uncertainty, there is often no clear winner between growth and value investing. Instead, investors should consider companies with stable revenues and dependable earnings growth as these companies are more likely to weather a recession.
“Conversely, economically sensitive value sectors, such as financials, industrials and energy, tend to lag alongside lowered growth expectations. Additionally, commodities can lose their attractiveness when consumer and industrial demand wanes, and real estate stocks may lag as poor economic conditions and declining consumer demand weigh on property markets,” Zhang said.
“Within equities and real assets, quality will be key and will help investors safely navigate a recession.”
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