BUILDING DEFENCE

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

The risk of recession has increased significantly in the near-term with the coronavirus-related shock; and amid heightened market volatility, investors have been looking for ways to build defence in their portfolios. Below, we break down two scenarios for economic shock:

  1. Growth slowdown: A slowdown in the rate of economic growth
  2. Stagflation: A period of high inflation, high unemployment and a slow or negative rate of growth in the economy

Expand the sections below to find out which asset classes may outperform and which may underperform in the growth slowdown and stagflation scenarios.

A growth slowdown: A slowdown in the rate of economic growth

Equities
Fixed income
Commodities & alternatives
  • Outperform:

    • Quality: companies with strong balance sheets and profit levels, and low amounts of debt
    • Gold
    • Defensives: companies that might be less prone to slowing demand, such as utilities providers, which provide a product that will remain in demand regardless of the state of the economy
    • Safe-haven single countries (e.g. Switzerland, Japan)
    • Property
    • Minimum volatility: companies whose share price might not be as volatile as others, based on historical data
  • Underperform:

    • Cyclicals: companies that tend to do well when the economy is growing, but suffer when the economy slows
    • Emerging market equities
  • Outperform:

    • Ultrashort and short duration: Bonds that will soon mature and therefore would be less exposed to future uncertainty
    • Inflations linkers/floating rate notes: Bonds with coupon payments that rise in line with inflation
  • Underperform:

    • Duration: Bonds that still have a long time until they mature and are therefore more exposed to future uncertainty
    • Spreads: Bonds issued by companies, which could be at risk of being unable to services bond payments and other debts
  • Outperform:

    Gold

  • Underperform:

    Oil

Stagflation: A period of high inflation, high unemployment and a slow or negative rate of growth in the economy

Equities
Fixed income
Commodities & alternatives
  • Outperform:

    • Defensives: Companies that might be less prone to slowing demand, such as utilities providers, which provide a product that will remain in demand regardless of the state of the economy
    • Dividend growers: Companies that are able to continue growing the amount they pay in dividends to each shareholder
    • Minimum volatility: Companies whose share price might not be as volatile as others, based on historical data
    • Safe-haven single countries (Switzerland, Japan)
  • Underperform:

    • Cyclicals: Companies that tend to do well when the economy is growing, but suffer when the economy slows
    • Value
    • Momentum
  • Outperform:

    • Inflations linkers: bonds with coupon payments that rise in line with inflation
    • Government bonds: bonds issued by governments, which may be unlikely to default on their debt obligations
  • Underperform:

    • Spreads: bonds issused by companies, which could be at risk of being unable to services bond payments and other debts
    • Short duration: Bonds that will soon mature and therefore would be less exposed to future uncertainty
  • Outperform:

    Gold

  • Underperform:

    Metals, Oil, Physical infrastructure

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any financial instrument or product or to adopt any investment strategy.