Despite the better-than-expected rise in UK GDP in May, investment managers believe that the possibility of the UK entering a recession in 2022 looms, as well as in Europe and the US, and discuss where investors should put their money.
Amidst high inflation rates, volatile and uncertain markets, Rupert Thompson, investment strategist at Kingswood Holdings, highlighted the benefits for investors of having a diversified portfolio.
Talking exclusively to WealthBriefing, Thompson said that global inflation will come down from the current highs, but it will not come down as fast as the Fed and central banks would expect.
“Supply side shortages are starting to ease and commodity prices have come off quite a lot, but there could be further spikes,” he added.
He believes that inflation will remain a problem for the next two years and a mild recession is likely in the next couple of months. How deep the recession will be will depend on how deep a recession the central banks and Fed are prepared to tolerate in order to reduce inflation, he explained.
With Europe suffering from an energy price problem, provoked by the war between Russia and Ukraine, Thompson believes that Europe is more vulnerable to recession, followed by the UK and then the US.
Despite the better-than-expected rise in UK GDP in May, registering 0.5 per cent growth, he highlighted that the UK is still expected to have the weakest growth in the G7 and it is vulnerable to recession.
This was echoed by Marc Cogliatti, principal in the global capital markets team at Validus Risk Management, who said: “The news will help ease some of the concerns about the health of the UK economy, but at this stage, there is still a significant risk of recession as we head into the latter stages of 2022 and beyond.”
“The possibility of the UK entering a recession during the second half of 2022 and beyond still looms large,” James Brown, managing partner of the London office at Simon Kucher & Partners, added.
Dan Boardman-Weston, CEO and CIO at BRI Wealth Management believes that the GDP figures are likely to get worse over the coming months as pressures continue to mount on consumers and businesses, as inflation remains high and interest rates continue to rise.
“The Bank of England is already predicting the chance of a recession but feels forced to raise interest rates to avoid inflation expectations becoming entrenched,” he added. Nevertheless, the outlook for the economy could change at the margins depending on the outcome of the Conservative leadership elections, given the varying views on tax cuts in the short term, he said.
Faced with the volatile and uncertain markets, Thompson highlighted the importance for investors of having a diversified portfolio. He favours non-US markets and cheaper markets such as the UK. Wealth manager Kingswood is overweight in the UK, even though the outlook is not good, he said.
He also favours emerging markets such as China, which currently has low inflation and is easing monetary policy, rather than Europe.
Furthermore, he favours defensive sectors like healthcare, consumer staples which have outperformed in the past six months and which he believes will continue to do well, given that the recession fears will continue.
The firm also invests in energy, believing renewables to be key for the future. He thinks that the quality end of tech stocks – Amazon and Microsoft, for example – should also do well in the longer term over a five-year period.
Thompson highlighted that equities will still be volatile for the next six to 12 months whilst bonds are looking more attractive going forward. The firm also has some exposure to alternatives, such as infrastructure and property, but believes that they don't always perform as well as expected.
Wrapping up, he stressed that diversification is crucial in the next year and now is not the time to put all your eggs in one basket.
Kingswood Holdings, a wealth manager that operates in the UK and US, saw positive financial results for 2021, showing record levels of revenues and operating profit, after a series of acquistions. See here for details.