Investors have been encouraged to focus on quality in the face of a potential recession, which American Century Investments has forecast is the most likely economic outcome in the US.
The asset manager’s chief investment officer, Victor Zhang, warned that the recent banking crisis, which has seen a number of bank collapses and rescues, may add further fuel to the fire.
“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,” he said.
“The compounded effects of nine consecutive Fed 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.”
While inflation is on track to ease in the US moving forward, Mr Zhang predicted that it would still exceed 3 per cent, sitting above the Fed’s target rate of 2 per cent.
If the recession forecast by American Century does eventuate, Mr Zhang noted that US Treasury yields would likely drop and credit spreads would widen.
“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.”
In times of volatility, Mr Zhang said that investors stand to benefit from overweighting their portfolios to quality growth and value companies with stable revenues, dependable earnings growth, predictable cashflow, healthy balance sheets, and manageable debt load.
Meanwhile, he said that economically sensitive value sectors such as financials, industrials, and energy have demonstrated a tendency to lag alongside lowered growth expectations.
Mr Zhang also warned that, in an environment of persistent higher-than-normal inflation, the spending power of investors will weaken over time.
“That’s why we believe inflation-protection strategies should be core components in fixed-income allocations, even if inflation falls from current elevated levels. Within equities and real assets, quality will be key and will help investors safely navigate a recession,” he concluded.
Jon Bragg
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.
