Goldman Sachs Research has warned that the UK could be heading for a deeper recession, with 2023 annual growth now forecast to be –1.0% (versus –0.4% previously) and Q4 now expected to see the economy contract by –0.6% (compared to –0.1% previously).
The bank also predicated a further –0.4% contraction in Q1 of next year. The outlook downgrade comes despite the government’s attempt to calm the markets with a U-turn on most of its unpopular mini-budget tax cuts, suggesting that the country’s political disarray continues to impact the smooth functioning of the markets.
“Although equities have already suffered a steep decline, history suggests investors are better off staying the course and even looking for opportunities to overweight stocks.”
However, the concurrent global downturn in both the equities and bond markets is relatively rare, according to Sharmin Mossavar-Rahmani, the head of the bank’s consumer and wealth management investment strategy group, who recommends that investors stay loyal to US equities. Although US stocks and bonds lost 24% and 9%, respectively, over the first three quarters of the year (to end-September 2022), he points out that negative performance across both asset classes has in fact only occurred 3% of the time since 1927 – and that in fact, annualised returns for the UK equities market since March 2009 are up by 15% as of 7 October 2022.
“Although equities have already suffered a steep decline, history suggests investors are better off staying the course and even looking for opportunities to overweight stocks,” she said. “That’s because equity returns in the six-24 months after bear markets have been well above average, according to ISG data.”
The problem is that this unusual trend means that bonds are no longer buffering equities as reliably as in the past, according to Christian Mueller-Glissman, head of asset allocation research within portfolio strategy at Goldman Sachs, exacerbated by central banks’ focus on controlling inflation, meaning they are no longer seeking to cushion losses in the financial markets.
Mueller-Glissman recommends a number of strategies during the current bear market to protect an equity portfolio: including a focus on quality (strong balance sheets and steady profits), dynamic risk allocation, options hedging to provide insurance (selling call options to buy puts) and cross-asset option overlays (for example, currencies and commodities, which tend to have larger swings in prices during periods of high inflation, increasing the opportunity for alpha).