Michael Blayney: How to invest in a recession | Pendal Group
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Michael Blayney: How to invest in a recession

If the US falls into recession, investors should be ready to buy falling equities and take advantage of higher bond yields, says Pendal’s head of multi-asset MICHAEL BLAYNEY

IT’S probable the US Fed’s rate hikes will push the world’s biggest economy into recession this year.

“Some of the forward-looking indicators in the US like the ISM’s Purchasing Managers Index are showing signs of weakness,” says Blayney.

“There have also been some broker earnings downgrades, though history tells us that the more significant downgrades tend to happen after the event.

“Overall, this has been one of the most forecast US recessions ever.”

How should investors respond?

How to invest in a recession

Sticking to a long-term strategy is critical, Blayney says, though at the edges there is room to move.

That means holding a little more cash than usual, he says.

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Pendal Multi-Asset Funds

“At this point it pays to be a little cautious, so we are a little underweight US equities.

“Last year the most important thing was to be underweight both bonds and equities in aggregate.

“At present we prefer taking relative value positions since markets are much less expensive than they were, effectively pricing in some of the bad news.

“While we are underweight the US, we maintain overweights to some of the cheaper, more ‘value’ equity markets like Australia and the UK.”

Investors should have some “dry powder” ready to use if valuations fall as a result of a recession, Blayney says.

“If the US goes through a recession and earnings are hit and markets fall, there will be an opportunity to buy equities. Markets do tend to over-react – both when times are good and when times are bad.”

Bonds look reasonable

Bond yields are now at “reasonable” levels, Blayney says.

The critical point is when the US Fed stops lifting interest rates, and potentially changes course and starts cutting.

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“If there is a recession, having some bonds in a portfolio will be a good thing because the  Fed will have to step back from lifting rates.

“But it’s likely the Fed will want to make sure inflation is beaten before moving to cut rates.”

“In terms of momentum, the trend has been against bonds even if their valuations are now okay.

“But the cycle is turning a little bit towards government bonds in the sense that the economy is weakening.

“We are still slightly underweight, but I think government bonds are now reasonable value.

“If you look at corporate bonds, they got a bit cheaper last year.

“But credit spreads have come in as equity markets have risen. So compared to government bonds, corporate bonds are not offering great regward for risk if there’s a recession on the way.”

It’s not about forecasting recession

Good portfolio construction is not necessarily about trying to forecast recessions, Blayney says.

“It’s about maintaining balance, having a long-term strategy, at times dialling down the risk, and at other times dialling up the risk.”

Why bonds, why now

Ausbiz’s Nadine Blayney interviews CBA chief economist Stephen Halmarick and Pendal head of bonds Tim Hext

ON-DEMAND WEBINAR

About Pendal’s multi-asset capabilities

Pendal’s diversified funds provide investors with a variety of traditional and alternative asset classes and strategies.

These include Australian and international shares, property securities, fixed interest, cash investments and alternatives.

In March 2024, Perpetual Group brought together the Pendal and Perpetual multi-asset teams under the leadership of Michael O’Dea.

The newly expanded nine-strong team will manage more than $6 billion in AUM and create a platform with the scale and resources to deliver leading multi-asset solutions for clients.  

Michael is a highly experienced investor with more than 23 years industry experience, including almost a decade leading the team at Perpetual.

Find out more about Pendal’s multi asset funds

Contact a Pendal account manager here


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