JANUARY 25, 2023 • EDWARD HAYES
Advisors will need to stay alert and become more active with their client’s investment portfolios as they prepare to go through a unique, but relatively short recession this year, according to two investment reports.
Acuity Knowledge Partners, a London-based research center, and the Group of Boutique Asset Managers (GBAM), an international network of senior executives from independent specialist asset management firms, released their respective forecasts and insights for the coming year.
Acuity provides research and analytics to firms in the financial sector while GBAM works together to provide networking opportunities and advice for others in their field, according to the organization’s website.
The two are anticipating a recession that will be brought about by the actions of the central banks around the world including the U.S Federal Reserve in response to inflation. Given the high levels of inflation, central banks have been aggressively raising interest rates. While it can help deflate inflation it also can cause the economy to slow down.
This recession will be unlike others because it will come about mainly by the hawkish stance of central banks which are prioritizing the fight against inflation, they said. Therefore, the industry might not see any stimulus come through.
Advisors will have to manage this recession by closely monitoring the market and giving actionable insights to their clients, according to Priya Vaidyanathan associate director of Investment Research at Acuity.
“This time the recession is largely because of the policy rate hikes by the Fed and other central banks … in order to contain inflation,” she said. “This year will be dominated by volatility in the market.”
With the expected volatility in the markets, advisors and investors are going to have to approach their investment strategies differently than they have in the past, according to GBAM.
“[This] year will be very different from the last which brings significant challenges requiring a different approach to managing and building portfolios,” said Paulo Del Priore, a member of GBAM, and the founding partner of Farview, a global multi-strategy investment manager based in Sao Paulo, Brazil. “One approach that manages risk is through portfolio diversification and properly priced risk premiums, particularly when seeking market liquidity.”
Advisors should maintain regular and ongoing communication with their clients because market volatility could require a rebalancing of clients’ portfolios to achieve their financial goals during this upcoming recession, Vaidyanathan said.
To stay on top of the markets, understand the impact on their respective client portfolios, and prepare clients for the possible outcomes, advisors will have to become more active managers than passive, she added.
“They will have to analyze what other impacts there are on their respective client portfolios and come up with strategies to preserve the wealth of the client,” she said. “It is more about personalization and customizing the plans for each and every client so that their respective financial goals are met.”
In addition, investors are looking for a more hybrid model when it comes to their work with advisors, she explained. There is an increasing need for digital tools including dashboards to help investors monitor their portfolio, according to Vaidyanathan.
They are also looking for specific investment advice to help them through the more of the complex investment strategies they are employing.
Tim Warrington, the chairman of GBAM and chief executive of SKAGEN Funds in Stavanger, Norway, said the opportunity to thrive in this economy is there for the right investor.
“Being greedy when others are fearful confers advantage, especially when applied together with a longer-term investment horizon,” he said. “It is the same in any period of crisis or uncertainty, whether international or domestic [that] those actors that focus on what they can control and care less about what they cannot, invariably prevail.”
When determining proper investments for the coming year, Vaidyanathan said there are three basic categories. The first are corporates, which have stable cash flow, low leverage and a good track record of profitability.
The second are sector investments including utilities and healthcare because they provide a good inflation hedge. Finally, investment-grade bonds and alternative investments are wise investments during turbulent times, according to Vaidyanathan.
In terms of the duration of the recession, Vaidyanathan is not anticipating a long one. She expects it will last up to four quarters. By early next year, or maybe before the end of this year, she predicted there will be signs of a recovery.
Inflation is at the heart of the circumstances that will ultimately lead to the recession, according to the boutique managers at GBAM. They believe that here in the U.S. as well as in the United Kingdom, inflation might have peaked.
However, it is unclear what impact they will have this year given the failure by many to accurately predict their longevity.
“Due to central banks’ failure in predicting inflation, interest rates should be higher than markets expectation if they want to keep their credibility this time,” said Jose Luis Jimenez Madrid, chief investment officer at Madrid, Spain-based Mapfre. “This will happen in US and emerging markets, but it is not so clear in the euro zone.”
One variable that Vaidyanathan said could upset everything in the economy is the war between Russia and Ukraine. It is the one variable no one can predict.
“There will be an impact on energy and food prices because of the war … so the course of the war will also determine how inflation trends will pan out,” Vaidyanathan said.