There is a one in three chance the British economy will enter a recession in the next year, according to the Bank of England. The chances do depend on the Brexit outcome but either way the global economy is not looking too perky. The US-China trade war is taking its toll and recession risk is rising. But is your portfolio built to withstand one?
Recessions do not necessarily mean that stock markets plummet, but they do bring around a change in where people invest, what they are willing to buy and what they’re likely to sell.
One rule of thumb is that portfolios focused on the stocks or industries that grew the most before a recession will suffer, as what went up the most in times of exuberance can come back down as quickly when markets turn conservative.
Fret not, however, as we take you through some of the investments you can add to your portfolio to help protect it from a recession.
Gold and gold miners
The precious metal has become known as one of the best stores of value, having been used by investors this way for centuries. It certainly has its uses in modern-day investing, and the price of gold recently hit a six-year high as many rushed into it amid fears over the global economy.
Rory McPherson of Psigma, an investment firm, said buying gold mining stocks was one way to have exposure to both gold and the stock market. Gold mining share prices tend to follow the ups and downs of the gold price, but with more vigour, so can be a handy buy when the price is rising.
For example, the MSCI All Country World Gold Miners index, a benchmark that tracks gold mining stocks, has gained 48pc this year, while the gold price has risen by 21pc.
Mr McPherson said: “In a world where interest rates are low and don’t even beat inflation, demand for precious metals like gold, where returns can outstrip inflation, makes sense. If you add scarcity and corporate changes among miners, such as mergers and acquisitions, there’s a very good investment case.”
Conventional wisdom is for investors to move towards “safe-haven” assets, such as British government bonds, known as gilts, or their equivalents in other developed countries such as America, Germany, France or Japan.
Government bonds are used because they provide a reliable income stream and the payer (a government) is unlikely to default. The value of the bond is normally reasonably secure in times of recession and stress, when investors flock to safety.
However, because central banks have been printing money and buying bonds ("quantitative easing"), the price of bonds has shot up and their yields have plummeted. The income received is often minuscule or nonexistent, making the risk of losing money greater than normal.
Mr McPherson said: “Bonds still make sense, but do not rely solely on the traditional government-backed ones. We have a preference for shorter-dated bonds, those that will expire and pay out in one to three years. If you invest in funds that hold bonds from high-quality companies you can get a good yield and returns better than inflation.”
See the Telegraph 25 for some of our suggested bond funds.
Although stock markets often struggle during recessions, some “defensive” stocks can hold their own. These tend to be companies whose profits and performance are not affected by an uncertain economic environment and can make money regardless. Examples include consumer staples companies and utilities.
These stocks can be expensive, however. Diageo, the maker of Guinness and Johnnie Walker, is a classic defensive stock but its shares currently trade at a price-to-earnings ratio, a popular measure of value, of 25 , while the wider London market trades much more cheaply at 14 times earnings.
In times of need, however, paying over the odds to protect your portfolio can be a necessary evil.
“Buying these sorts of stocks, which would feature in ‘quality growth’ British funds, in advance of a recession is akin to ‘fixing the roof while the sun is still shining’ and would serve investors well,” Mr McPherson added.
Among the funds that invest in this way, Lindsell Train UK Equity is often recommended by advisers.
The arguments against selling out of risky investments such as stocks and moving into cash ahead of a recession are plenty. One is that it’s impossible to time such changes right.
However, there could be some merit in keeping some cash to help protect against falling markets and to ensure you’re ready to "buy the dips", according to Darius McDermott of Chelsea Financial Services, an investment shop.
“It’s important to stay invested in stock markets to some degree,” he said. "The danger is, however, that a sharp rise in markets and a meltdown could come in quick succession. In an ideal world you would participate in the former and avoid the latter – but that is easier said than done.
“So it could help to keep some spare cash for buying when the market falls, by topping up existing holdings at a better price, for example, and not make a big call one way or the other."