Business Maverick

BEAR MARKETS

Where are the investment safe havens during a recession?

Where are the investment safe havens during a recession?

High inflation, geopolitics, the war in Europe and a looming recession sent equity market indices tumbling into bear market territory during the first six months of this year. As with most bear markets, this has prompted investors to seek safe havens and find tactical investment opportunities to take advantage of current market conditions.

Izak Odendaal, strategist at Old Mutual, says a bear market early on in your investment lifetime is not necessarily a bad thing. 

“If you keep saving and aren’t scared off by the experience, you get to buy cheap equities and hold them for decades. However, a bear market late in life can cause serious damage, especially if you are required to sell shares at big discounts to draw retirement income. 

“Therefore, it’s important to have other assets in your portfolio to cushion against such a scenario,” he says. 

Roelof Feenstra, portfolio manager at Independent Securities, says although recessions are generally negative for equities, high-interest environments do benefit certain sectors such as industrial commodities, gold and property. 

“Alternatively, investors with a longer-term strategy could use this environment to acquire shares in quality companies trading at significant discounts, with the potential to recover strongly once economic growth returns,” he says, adding that he believes the spike in inflation in the US has already happened, and although inflation could remain relatively high over the short to medium term, there are signs that the rate of change is moderating. 

While Feenstra acknowledges that the US could enter a recession during the second half of this year, he stresses that – as with all things in global markets – it is challenging to predict these events with any certainty. 

“What is clear is that the US will experience a reduction in economic growth caused by the aggressive monetary tightening of the US Federal Reserve. 

“It also seems at this stage that the Fed is desperately trying to catch up with inflation, risk overshooting with their response, and risk increasing rates too aggressively, which could push the US economy into a recession.  

“Global inflation has been spurred by the extreme stimulus measures implemented by governments and central banks during the Covid pandemic. The resultant surge in demand was met by supply-side constraints as lockdowns severely disrupted global supply chains,” he says. 

Russia’s invasion of Ukraine has only added to inflationary pressures, and the subsequent sanctions on Russia have led to an acute global shortage in the supply of key commodities.  As a result, global oil, gas and metal prices have increased significantly. 

Ukraine is also one of the major producers of wheat and suppliers of fertiliser to the world, and the subsequent loss of this supply of these key commodities has also contributed to the current high levels of inflation, resulting in a significant supply-demand mismatch for commodities in the market. 

However, senior portfolio manager at Coronation, Neville Chester, is somewhat optimistic on the grounds that South Africa’s Reserve Bank is one of only a few central banks globally that has responded appropriately and timeously to inflation. 

Chester says with South Africa’s inflation rate (6.5% in May) well below rates in many developed markets, South African equities and government bonds currently offer “compelling investment opportunities”. 

Although it is currently popular to be taking more money offshore, given the recent change in Regulation 28 to increase the foreign asset limit for SA retirement funds, Coronation believes now is not the time to be switching aggressively from very cheap domestic assets into more expensive global markets, where inflation is out of control and interest rates will keep rising.

Gold is generally seen as a safe haven for investors during turbulent times and tends to perform well during stagflationary periods, according to Feenstra. 

He notes that property has also historically done well during such periods, as the effects of inflation get passed through to rental escalations and mortgage rates are typically fixed while the replacement value of assets also rises.  

Industrial commodities are materials used to produce goods and are also a key component of inflation baskets. During periods of high inflation, such inputs costs are rising and investors exposed to companies producing such commodities can expect good returns.

“Given that energy and food prices are currently the biggest drivers of the high levels of inflation globally, it makes sense to strategically invest directly into these assets. 

“You can do so by, for instance, investing in the iShares MSCI Global Agriculture Producers ETF, which has generated a return of 21% over one year, and in the iShares MSCI Global Energy Producers ETF, which has returned a substantial 49% over a year,” Feenstra says. 

He says periods such as these are great for active managers as there are pockets of value emerging that offer attractive opportunities. A mild recession is already priced in, and the risk-reward setup is sufficiently favourable to start adding quality stocks to portfolios. DM

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