17 Mar How to keep making money during a global recession

Economists are now certain that a global recession is “highly probable”. The President of the United States announced on 11 March 2020 that travel from 26 European countries is banned for 30 days as a measure to stop COVID-19 spreading into the country. While the ban excludes the UK and Ireland, for the rest of Europe it is now in place. The announcement was meant to stem fears of a recession, but it’s done nothing so far to stop heavy financial losses in markets around the world.

Indeed, at the same time as the US announcement, Wall Street futures trading and Asian stock markets continued to plunge deep into the red. Investors have spoken and they are betting that the US’s $250 billing package will not ensure that the world’s biggest economy will remain open.

Will coronavirus cause a global recession?

Elsewhere we are also seeing huge economic ramifications caused by the coronavirus, which is now officially a pandemic, according to the World Health Organisation (WHO). Italy’s government has effectively shut down the entire country, with the closure of all non-essential businesses. The entire population of 60 million are under lockdown as Italy is the second-worst affected country behind China with a count of 12,000.

Global cases of COVID-19 have exceeded 126,000, with more than 4,600 deaths. China still has the highest number of sufferers and deaths, but the numbers are falling according to official data. In the US, cases have risen by more than 1,300, and the US State Department has issued guidance advising US citizens to ‘reconsider’ all overseas trips.

Economic measures announced in the US package include financial assistance for people who can’t work, are quarantined, or are looking after others who are ill. However, it’s unlikely that these measures will be successful in holding back the shutdown of major global economies. The cessation of economic activity could destroy supply and demand simultaneously.

During and just after the president’s address, the Asia Pacific markets plunged into full sell-off mode. In Tokyo, the Nikkei fell 5.4%, Hong Kong fell 4.3% and the ASX200 in Sydney fell 7.2%. We’re also seeing steep falls in airline shares, with Australia’s Qantas plunging 11% and Singapore Airlines down 4%.

How can investors mitigate losses during a global recession?

While global markets remain in turmoil, investors are turning to safer assets, such as government bonds and gold. Here’s how my team manages our investments, to mitigate the possibility of any losses. Investments run seasonally, with economic cycles mirroring the four seasons of the year.

Problems arise when things go well for a long period of time, and the temptation is to stop planning ahead. While riding positive waves can feel good, it sets you up to crash when the cycle changes. My fundamental strategy for investment hinges on understanding economics and business cycles in order to make decisions accordingly.

We always invest carefully and cautiously with the following words as our mantra: “Rule number one: never lose money. Rule number 2: don’t forget rule number one…” said by one of the world’s most successful investors, Walter Buffet.

Our investment strategies

We invest based on two basic ideas. First and foremost, we are Business Cycle Investors (BCI). We also follow s Dynamic Asset Allocation (DAA).  Here’s how these strategies guided our investments in 2019. First, a quick explanation of each strategy.

1. Dynamic Asset Allocation (DAA)

An extension of Strategic and Tactic Asset Allocation, DAA means fewer restrictions on what you buy and sell in your portfolio. Below is a comparison.

1. Strategic Asset Allocation – built around risk profiling. Very sensitive to business cycles, it yields anticipated returns of between 3-6%.
2. Tactical Asset Allocation – a core approach for building portfolios. Less sensitive to business cycles, with returns between 5-8%.
3. Dynamic Asset Allocation – fully flexible, works with business cycles by anticipating when to exit/deploy markets, and has anticipated returns of 12%+.

2. Business Cycle Investing (BCI)

This investment approach is centred around economic theory. Economic cycles can be likened to the four seasons and investors following this way of investing focus on the big picture performance of sectors, rather than individual stocks. A commonsense model, BCI dictates investment decisions based on the wider economy.

These methods can be used to determine which investment decisions are best, based on where the economy lies on the business cycle. In early and mid stages, investors favour equities, and in later stages move away from this into other sectors.

Understanding the economy means better decisions

Our investment committee decided that defensive assets were the best bet in 2019, based on the economy entering the late stages of the business cycle. These assets included cash, private secured credit, corporate bonds, gold and government bonds. All of these assets performed well for us, with a return on investment of 24% for gold, 15% for private credit and 7% on corporate bonds. Government bonds are starting to come into their own for us now too, and cash creates a balance for our portfolio.

For investors with the same approach, who believe that economic cycles are seasonal, success lies in preparing early for the changes ahead. Moving into 2021, much will depend on the impact of COVID-19 on global markets. I think that gold, cash and government bonds will continue to do well in 2020, and an increase in investors will shift from equities to these sectors. If the economy continues evolving as it is now, equities will be heavily hit by 2022, making it a good time to go back to this sector.