A recession is rarely good for investments in the stock market. That’s even though it’s broadly accepted that we need to see downward pressure on growth to bring inflation down and in line with long-term targets.
This week the Bank of England (BoE) said that the recession is now expected to last just over a year rather than almost two, noting the impact of falling energy bills fall and price rises slowing.
So, what does this mean for my investments?
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Forecasts change
The announcement on Thursday came as interest rates were raised to 4% from 3.5% — their highest level in over 14 years. It also resulted in the FTSE 250 surging around 2.5% in afternoon trading.
As mentioned, negative or low growth is required to dampen inflation. Protracted or embedded high inflation is, in the long run, more damaging to the economy than a short-lived recession.
However, it’s also worth highlighting that economic forecasts can change quickly. Monetary policy is just one of a host of factors influencing economic growth, and in turn, the performance of companies listed on the stock exchange.
As we know, wholesale gas prices can have profound impact on economic activity. But in the UK, it’s widely accepted that the economy is being held back by other factors. Productivity is down, the labour force is shrinking due to Brexit and long-term health issues, trade has been hit by Brexit barriers, and foreign direct investment has fallen.
My belief is that things can change, and things have to change. There are several policy decisions that could improve the growth horizon later in the year. Maybe a year-long recession could be avoided.
Impact on my portfolio
But under the current forecast, the UK economy is unlikely to return to pre-pandemic levels until 2026. That’s shocking.
Share prices tend to fall during a recession. But UK stocks haven’t exactly rewarded investors in recent years anyway. The FTSE 350‘s growth over five years is in mid-single-digits and over two years is even lower.
Under the current circumstances — a long-term low-growth environment — I shouldn’t expect the FTSE to deliver world-beating returns. And the new forecast only paints a marginally better picture. A traditional approach in these circumstances is to invest in defensive stocks that tend to outperform during recessions.
There will, of course, be exceptions to the rule. I’m looking to stocks in certain sectors such as green energy to provide me with greater returns. That’s because I tend to look towards long-term trends when I’m seeking growth opportunities.
I’m also looking increasingly at overseas opportunities. For example, I own two funds focused on the Indian economy — the nation is likely to be one of the fastest growing in 2023, despite the recent Adani Enterprises collapse.
As a long-term investor, I can also see this is an opportunity to pick up cheap shares. The UK’s economic outlook is a considerable factor is why several Britain-focused banks, such as Barclays, trade with such low multiples. I’ve recently topped up on Barclays and Lloyds.
