Cautious investors are being advised to protect their portfolios against the impact of a “double-dip” recession – even though market strategists disagree over the threats to economic recovery.
This week, Barclays Wealth chief economist Michael Dicks forecast that the probablilty of the UK falling back into recession next year was “one in three”. But Jeremy Bastone-Carr, head of research at stockbrokers Charles Stanley, believes that a lurch downwards into negative growth is now “unavoidable”. Meanwhile, Graham Frost, head of research at independent advice firm Bestinvest, has ruled out the possibility. “Although there is little growth ahead in the developed world, we should be able to avoid economic contraction over the next few years and therefore a double-dip recession,” he argues.
Even so, a majority of advisers is now recommending that cautious investors re-jig their asset allocations to prepare for another slowdown. “The more positive you are on the outlook, the more equities you should hold and vice-versa,” says Frost.
Charles Stanley’s Batstone-Carr favours a “half-way” house approach, where most investments are defensive and aim to preserve capital. He says there are four elements to this strategy. First, buy stakes in high-yielding income stocks. For example, he notes that Vodafone’s prospective dividend represents a 6.3 per cent yield, while National Grid yields 6.7 per cent, Scottish and Southern Energy 6.3 per cent and AstraZeneca 5.5 per cent.
Second, Bastone-Carr advises investors to protect their portfolios against equity market volatility, which spiked upwards in the second quarter. To do so, he suggests taking stakes in long-short hedge fund managers. For example, London-listed, dollar-
denominated versions of Blue Crest AllBlue, Brevan Howard Global and Brevan Howard Macro are all up more than 30 per cent over the past 12 months – and advisers say that these vehicles are a sound investment for the long-term as their managers can exploit a variety of trading strategies. “Brevan Howard Macro and Blue Crest Allblue both performed very strongly last year and also did well in 2008 when markets fell,” points out Stephen Peters, a Charles Stanley investment analyst.
Third, Bastone-Carr suggests building up exposure to AAA-rated government bonds for the purpose of capital preservation. However, sovereign debt as an asset class is not “going to shoot the lights out”, he warns. Fourth, he recommends adding some precious metals to a portfolio now that there are increasing amounts of government debt in circulation. “I’m now a gold bug,” he says. “It’s essential that investors think about how best to minimise their exposure to default risks.”
Barclays Wealth proposes a different approach, however. A “barbell” approach is the way to ride out an economic and UK equity market downturn, according to Kevin Gardiner, Barclays Wealth’s head of global investment strategy. “We want to retain some exposure to pro-cyclical risk assets such as equities. But, at the same time, we want some exposure to assets that will perform in a deflationary climate, and are now raising government bonds to an overweight.
To fund the resultant ‘barbell’ strategy, we have extended our underweight in cash and reduced our weightings in other ‘in-
between’ assets such as corporate bonds.”
At the risky end of
the barbell, he is holding shares in undervalued South Korean companies and European information technology and industrial companies.
But even advisers who do not think a double-dip recession is likely agree that a more defensive portfolio makes sense. A Merrill Lynch report released this week shows that many investors have already reached this conclusion and have started buying into defensive equity sectors such as consumer staples and healthcare companies.
“Investors suffered a serious bout of risk aversion and preferred to accept safe low-returns in core sovereign debt from the US, UK and Germany at the expense of assets whose returns are more positively correlated to the economic cycle like equities and commodities,” wrote Merrill’s analysts in their CIO Weekly report on second-quarter activity.
US Treasuries returned 4.7 per cent in the second quarter of this year while global equities, as measured by the FTSE All-World index fell 13 per cent.
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