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A recession raises difficult questions for an investor. How likely is it, and how should a recession affect your portfolio strategy? In theory, markets grow when the wider UK economy grows and when corporations increase their earnings. In 2022, some analysts have raised concerns about a UK recession as the cost of living (inflation), interest rates and oil prices go up – although this is not a universally-held forecast.
In this article, our investment team at Bure Valley Group outlines the recession risk in 2022-23 and some possible implications for investors. We hope this content is helpful to you. To find out more about our EIS projects and other investment opportunities in our exclusive investor network, visit our portfolio page here. To enquire regarding our latest projects and funding (for investors and founders, respectively), you can reach us via:
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Recession: definition & risk in 2022
The UK accepts the definition of a recession from the Organisation for Economic Co-operation and Development (OECD); i.e. two consecutive quarters of decline in gross domestic product (GDP). The Bank of England, the UK’s central bank, has predicted a recession in the UK from the fourth quarter (Q4) of 2022. This is partly due to an expected drop in real household post-tax income, especially since higher energy prices are comprising a larger portion of expenditures.
This forecast is likely a key reason why the new Liz Truss administration has put growth at the centre of the government’s strategy. Britain’s Chancellor, Kwasi Kwarteng, is aiming for 2.5% trend growth by introducing a series of tax cuts to try and stimulate economic activity (e.g. cancellation of the 1.25% National Insurance rise and lowering the Basic Rate from 20% to 19% in April 2023). However, senior economists are widely sceptical that this target can be achieved.
Avoid fleeing to cash
When a recession is looming, it is tempting for investors to want to flee to the “safety” of cash. After all, regular savings are typically covered up to £85,000 per banking group by the FSCS (Financial Services Compensation Scheme) and the value will not fluctuate with stock markets. However, with inflation running so high in 2022 (currently 10.1%), the real value of cash will be steadily eroded over time – even at the best easy-access savings rates (currently 2.75%). With investors guaranteed to lose wealth by holding too much cash, therefore, investors should be careful not to simply abandon the markets during uncertain times.
Do some housekeeping
If you are concerned about a recession, take this opportunity to re-examine your holdings to re-check the fundamentals and diversification of the portfolio. During hard economic times, you need to be extra sure that the companies you’ve invested in can weather the storms. How do the balance sheets and financial statements look since you last checked them? Has your asset allocation changed more dramatically than you expected – possibly justifying some rebalancing? You might also want to review your overall financial security, ensuring that a possible decline in your portfolio would not destabilise you. For instance, the presence of high-interest loans and a lack of a meaningful emergency fund could put you at needless risk during a recession. Make sure you are not prioritising long-term gain over financial protection.
Build up your moat
Most businesses will face extra challenges during a recession. However, those with a strong moat around them are likely to fare better than low-quality, vulnerable companies. Certain sectors can also perform better during a recession (e.g healthcare and utilities) as consumers prioritise the “staples” when spending money, rather than goods and services falling into the “discretionary” spending category. Angel investors need to be especially mindful of their due diligence since early-stage companies are more likely to have high levels of debt whilst establishing profitability. To protect your portfolio, it is a good idea to check your diversification and make sure you are not excessively exposed to risk within a specific company, sector or market.
Stay the course
Assuming you are confident in your investment goals, time horizon, asset allocation and overall risk tolerance, a recession should not dramatically change your portfolio strategy. As an investor you have three broad choices when markets become volatile: exit and hold cash (a bad idea, as discussed above); change strategy or stay the course. The second option may be appropriate if your goals or risk appetite have changed. However, if nothing except the investment landscape has temporarily changed, why should you alter the strategy you spent so long crafting with your financial planner? Doing so would suggest that you were not completely confident in the plan to begin with. In which case, were you truly honest with yourself about your risk tolerance?
Staying the course with your investment plan can be emotionally difficult. Yet it is important not to base your decisions on impulse, panic or nervousness about what “could happen”. Being part of a network of experienced, sophisticated investors can help you gain perspective and insight into global events and how to respond to them rationally. If you’d like to explore our network at Bure Valley Group, then we’d love to hear from you.
Interested in finding out more about the exciting startup projects we have on offer to investors here at Bure Valley Group? Get in touch today to start a conversation with our team and discuss some of the great investment memorandums we have available here:
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