Article

Walking into recessions

You may have seen charts like the one below before (possibly here or here) which suggest that investors and commentators find more to worry about than they really should:

This certainly seems to have been the case for bulk of my investment experience (since 2007). In the aftermath of the financial crisis, something has come along every year or so to ‘roil’ markets, create volatility, and more often than not, create opportunities for investors with a longer time horizon.

In fact, despite all the fear surrounding these events, people with short memories and perfect hindsight now look back at this period as an era of ‘easy money’ when all you had to do was buy the dip; even though the most popular investment strategies over that phase have been those desperate to avoid volatility and shun equity correlation.

However, just because ignoring market fears has been the right strategy for much of recent history, it is clearly not always the case. The 2008 financial crisis illustrated that bad things sometimes do happen, and it can take a long time to make your money back in equity markets, particularly in the phases in and around recessions.

Of course, such phases of sustained loss aren’t limited to equities: an investor who bought German Bunds in July 2016 will have only just broken even in May this year.

But it does seem to be the case that recession fears loom larger in the collective psyche, and that’s especially true today. The degree of talk about recessions is back at levels similar to that of early 2016.

An inverted yield curve, intensified trade wars, fears of a hard Brexit, and weaker macro data have all heightened growth fears, as reflected in (or maybe intensified by) the equity declines and government bond rallies across the world seen last month.

How should investors respond to this? Is it right to ignore the fear and look at the recent dip as an opportunity, or is this another occasion where the market is proved right to be fearful?

An uncomfortable reality

For most of us it is wise to acknowledge that we cannot predict recessions. Many try – including the collective resources of the world’s Central Banks and organisations such as the IMF – and most fail.

The question we must ask is not whether we think there will be a recession or not, but: ‘how worried is the market, and why?’ After all, it is possible (theoretically) for an equity market to be so cheap that even if a recession does occur you can still generate a positive return, so long as expectations were sufficiently bleak beforehand.

Today, most equity markets are not as attractive as they have been for much of the post crisis period. In fact, many are not even as attractive as they were after the episode in December. But is the market complacent? The nature of commentary would suggest not, nor the price behaviour we have just seen and negative yields on German Bunds.

We also need to reflect honestly on our own emotions. I personally feel deeply uncomfortable, just as I did in most of the phases in the first chart. I can also roll out a long list of challenges to growth, and can see few, if any, potential catalysts for improvement. I also worry about looking extremely foolish if a recession does occur after ‘all the signs were there’ that it could happen.

However, the reality is that we need be honest with ourselves and view this discomfort as one of the main reasons we might be able to beat the market. Much of the strong return from equity markets since the financial crisis was due to the very fact that most of us were very worried about a repeat of 2008, and as a result were well paid to take on that risk.

Many talk about having long time horizons and a belief that being contrarian can create opportunities, periods like this challenge us to see if this is true.


The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.