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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


About Michael Blayney and Pendal’s Multi-Asset capabilities

Michael Blayney leads Pendal’s multi-asset team. Michael has more than 20 years of investment management and consulting experience. He was previously Head of Investment Strategy at First State Super and head of Diversified Strategies at Perpetual.

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

The team — which also includes Allan Polley — manages our multi-asset portfolios with a focus on strategic asset allocation, active management and tactical asset allocation.

Find out more about Pendal’s multi asset funds:

Contact a Pendal account manager here

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current at February 1, 2023. PFSL is the responsible entity and issuer of units in the Pendal Multi-Asset Target Return Fund (Fund) ARSN: 623 987 968. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com

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