How to fly through a recession.
Key Points:
According to the US Bureau of Economic Analysis, the US economy fell to an annualised -0.9% (against forecasts of +0.5%), marking an official RECESSION in the USA.
The definition of a recession varies between scholars and countries. The 1974 definition from economist, Julius Shiskin, leads the popularity tables defining it as two consecutive quarters of declining GDP.
We focus on advice for gliding trough a recession- noting that Mondial advice is for medium to long term financial planning not for speculators.
We focus on repeating our advice for protecting capital through multi-asset manager strategies because their research departments can move tactically from asset to asset, from liquid markets to illiquid markets with ease.
We focus on regular savings- and even capital “averaging” into equity risk markets as one of the safest risk plays in the current market scenario.
We counsel towards U-shaped recovery over V and other shapes which further underwrites our advice.
PLEASE ADJUST YOUR SET.
How to fly through a recession.
1. CONSISTENCY- FOLLOWING RECENT NEWSLETTER ADVICE.
Following the themes of Mondial’s Newsletters over the last two years will have set a solid foundation for gliding through torrid markets. Our advantage on advice is based on inputs from highly resourced Research Departments and not on general café chit-chat. We have channeled the actual advice, which has been boringly consistent over the period, through Newsletters with our Chart of The Week offerings adding specific insights to the broad Newsletter positioning.
Historical evidence of a consistent and valuable approach:
In September 2021: Our headline – “FAANGS- Baring their teeth or long in the tooth?”
In the year or so pre COVID, and continuing post the COVID March crash, the FAANGS had driven most-to-all the S&P returns.
Our article and superb research from Momentum, QC and VAM/Sanlam, called the sustainability into question.
Many passive investors jumped into the tech trackers and by Q1 2022 were feeling the pain of an over-priced sector.
In October 2021: Our headline- “Stagflation- A low probability high impact event”.
Our research departments begin to reflect on the factors which might lead to slower growth and higher inflation. This, during a still rising Bull Market.
COVID not yet solved, China slowdown and logistical issues dominating the headwinds.
In November 2021: Our headline- “The King Canute Theory of Inflation”.
Our research departments are actively managing strategies to deal with impending inflationary challenges.
This, whilst the preference for café chit-chat advice is to buy cheap and passive market trackers (seemingly) always rising.
Roll into 2022 and we have been increasingly cautious urging active research based, multi-asset management over passive index tracking.
Our Jan to June Newsletters continued the same themes:
1. For capital: Go active management, diversify, multi-asset management.
2. For regular savings or “averaging” capital: drip into volatile risk indices. Here passive investment has its place if it is into relevant trackers.
 March 2022: “Armageddon- or Happy New Year 2023?” |  May 2022: “Retirement Under Attack: From Russia with love”. |  June 2022: Mind the Gap”. preparing clients for a bad year. |
|---|
In short, pre- the downside market performances of H1 2022 our advice emphasised the need for diversification and multi asset managers for the management of capital and hitting the volatile indices with “new money” (regular savings) to add controlled risk. The Chart of the week- July 12th- Recap of H1 2022,reflects the fact that in H1 2022, unless you were holding the lottery ticket of oil shares, there was no liquid asset holding which provided growth and all cash holdings were losing purchasing power against run-away inflation. (Chart of the week 26th July, refer below).
 |
”Our slide “Multi-asset managers in action”, reflects what an active manager can do which passive managers and index tracking cannot- run for cover and find alternatives. In the slide, Momentum Asset Managers have held onto the declining liquid markets (equities and bonds) for the purposes of rebound, but have found solace in a weird mix including: Uncorrelated assets (typically hedge funds and absolute return funds), Gold, infrastructure and Chinese Bonds. Their aim is to control the downside performance until the upsides re-present themselves. For Mondial, with a client base focussed on the medium term, this reflects the aim of our Investment Policy.”
The possibility of sustained inflation casting a long shadow over recovery potential makes our boringly unchanging advice mantra even more important.
2. PLEASE ADJUST YOUR SET: FUTURE ADVICE.
Any day now the news of recession will mount, and the air of market negativity will rise alongside. We now believe that for medium-to-long term investments our boring advice needs to be re-stated and justified further. On this we raise the following 2 points.
2.1 A recession is a normal part of a business economic cycle.
A good reason for not jumping out of windows is because the economic cycle is actually the painful bit of a normal economic cycle.
The US economy experienced a 7 month recession in 2008 to 2009, and an 8 month recession in 2020. They are not that rare.
Recessions aside, as our first Diagram in our April 2022 Newsletter showed, markets bounced back from the GFC into a strong bull market as the economy recovered
Whilst each recession may have different causes and features, our advice for US equities is to stick with Warren Buffets faith that it has never been wise to bet against the US equity market.
As we adjust our thinking- we believe that for medium term thinkers and for long term Pension and Workplace Savings- the current recession is a fantastic timing opportunity for medium-term savings by buying into volatile equity indices..
2.2 How long will recession last?
The big question to handle for managing performance expectations relates to the recovery pattern for the S&P index- being our global benchmark for risk indices.
A V-shaped recovery? Highly unlikely. The COVID surprise of February 2020 led to the March 2020 S&P collapse, yet the phenomenal vaccine response contributed to a 100% recovery in the year following that crash. It’s not easy to see the V-shape for markets in the current scenario simply because corporate earnings are under attack from higher inflation. Inflation triggers inflationary wage demands; add-in the continuing supply chain/logistics issues and Chinas zero tolerance lockdown policy (before we mention Russia) and the obvious result is higher costs. These costs are carried by shareholders- i.e. increased corporate costs, less corporate earnings, unless they can increase prices which continues to ignite the inflationary spiral.
An L-shape recovery?. Could this be where recession turns into a depression? Our research departments are not thinking this way at all. Not least because employment rates are still quite high in developed economies. This would require further almighty shocks to the economic system- a nuclear strike? Such thoughts represent too much doomsday thinking for now.
The U- Shape recovery? Here is where the weight of research department thinking lies. Much lies on whether Putin’s Ukraine adventure turns into a long-term winter slog. This might exacerbate the already high demand for fossil fuels, and freakish energy bills turning more normal. Even if the War ends tomorrow the lag time towards normal will be considerable. Other drags on economic growth could disappear but whilst the war in Ukraine holds food prices and energy bills hostage the route to recovery will be weighed down. However, on this the view of all our research departments suggest that we are at the beginning of the end of high inflation. Last week the Fed increased rates by 0.75% to help the attack on inflation. The Fed Chairman Powell noted “We are now at levels broadly in line with estimates of interest rates and after front loading our hiking cycle until now we are much more data dependent moving forward”.
Within our U- shape recovery we expect some Ws reflecting volatility. All this would support our suggestion of separating Capital (protected by multi asset managers) and regular savings into the volatile W equity indices.
SUMMARY.
Recession. We run away from it or face it. What we are facing is normal to any business cycle. Our advice is to focus on defending capital from inevitable bad news and volatility through the research departments of multi-asset managers. They can move between assets by remaining active. Nevertheless, we remain rooted in the belief that the S&P 500 index will revert to mean and pick up its inflationary and upward trajectory at some point leading us to counsel regular purchases into that index to enjoy the volatility that this market will provide.
We stand by this boring advice…. Knowing we will lose to lottery ticket holders but we will beat the best of the rest over the usual economic cycles.
For more details, or to contact Sean Kelleher CEO, Mondial Dubai LLC,
please contact us at
+971 56 2228 535