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7 Minutes on Markets - Q1 2023 Market Update

Ahmer Tirmizi, Head of Fixed Income Strategy09 Feb 2023

In our latest 7 Minutes on Markets podcast, Ahmer Tirmizi, Head of Fixed Income Strategy, and Salim Jaffar, Investment Analyst, discuss the outlook for 2023. Over the next seven minutes, they cover 7IM’s thoughts on the impending recession, why cash is still not king and how 7IM is positioned for the future.

Transcript (Part 1)

Hello and welcome to our new podcast here from 7IM. Today, we have Salim Jaffar, Investment Analyst and Ahmer Tirmizi, Head of Fixed Income Strategy. Welcome both. So today we're here to discuss the outlook for the year and how 7IM is positioning itself. Shall we start by looking at the global picture? Everything seems a bit doom and gloom at the moment with a recession upcoming, why is this? Salim, why don't you tell us, first?

Salim Jaffar:
Hi there. Yes that's right. Almost everyone is predicting a recession of sorts and if you go through what big banks are saying, pretty much all of them are saying some synonym of mild recession and even the most bullish of those, Morgan Stanley and Goldman Sachs are only saying that the most likely outcome is to narrowly avoid a recession. And this is because pretty much all the indicators that you usually look for that predict a recession are there. The yield curve is pretty aggressively inverted, margins are being squeezed considerably and the manufacturing sector PMIs are looking pretty bleak. I guess lastly, this is something central banks are willing to accept. So they're willing to accept a recession because this is something they think they need in order to control inflation.

Thank you Salim. And some of us of course will remember past recessions like 2008 for instance. How would the incoming recession compare with the one that we saw in 2008?

So we don’t think it’s going to be as painful. As I’m sure most people would have heard, every recession is different. But there are some lenses through which we can compare them. So I think that a key difference with this recession and 2008, is that central banks are the ones in control. In 2008, they really weren't. The recession was a nasty by-product of the long build-up of issues and bubbles and markets. Regulators had really taken their eye off the ball and this had led to things being, for a long time, building up and hence the recession was pretty nasty. In this recession, it's pretty much being squeezed into existence by central governments. Because the way that they see, and the way you bring inflation down in the long run, is by bringing your interest rates up and really controlling wages. So I guess that's the key difference, is that this time central banks are in control, and as a result it's not a nasty surprise, or won't be a nasty surprise like it was in 2008. And there are other factors like consumers do still have money. Savings are there, and systemically important companies aren't going to suddenly go under and need help from the regulator in the recession that we see coming.

Thank you Salim. Turning over to you now, Ahmer. Given the view that Salim just explained, why would you want to invest your money now? Why not stay in cash?

Ahmer Tirmizi:
That's a really good question. That's probably the question that investors always ask themselves. When you hear the word recession, imaginations tend to run riot. People tend to think of the worst outcomes. Double-digit falling house prices, lots of people laid off, so it's understandable to ask yourself “why don't I just sit this one out?”. But the thing is, moving to cash, is almost never the right thing to do. Cash is not king. Instead, one of the things that investors need to do is to remember that they have long-term savings goals. And as part of those long-terms savings goals, or those long-term savings plans I should say, it has always incorporated some kind of equity market volatility. Some kind of challenge to that in the near term. So, always remember, that the investment plan captures these kinds of situations anyway.

Transcript (Part 2)

Perfect, and how specifically are you preparing your portfolios to cope in this environment?

There's quite a few different things that we've got. So number one, what we do is we tend to adjust our amount of equities that we own. We can go overweight equities, we can go underweight equities, relative to what is appropriate for a long-term savings goal. Now we don't suggest that our clients do this, but this is something that we monitor on an ongoing basis and at the moment we've moved to an underweight position versus a long-term asset allocation. Another thing that we've done, is to maintain a diversified exposure to different equities. What you tend to find, is that particularly going into a recession, investors can often be concentrated in one market, and that one market tends to be the market that becomes most vulnerable. So what we tend to do, is essentially diversify our expose to different equities. We have some in the US, some in the UK and some in emerging markets. So that if a recession does come about, no particular market is going to necessarily take portfolios down. And then finally, at the moment right now in particular, we've replaced some of that equity exposure, that traditional growth asset in portfolios, with a series of different asset classes. One of the notable ones is with credit. Now, credit is essentially just bonds, but it's bonds that are issued by companies. At the moment, they're yielding, they're returning somewhere between 5% and 10%, depending on the riskiness of the company. And that 5% to 10%, that's in line with reasonable equity returns. You have a situation where we can lend to a company for much less risk than you can actually buy a stock, but you get very similar levels of returns. So, three things that we're doing: adjusting our equities down, having diversified equities exposure, but also diversifying the types of return driving assets that we have, things like credit in portfolios.

Great, thank you very much for sharing your thoughts, Ahmer and Salim. It was great to hear them, and that's all from us at 7IM.

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