The UK economy contracted by 0.3% in April 2022 after it shrank 0.1% a month earlier.
The Office for National Statistics (ONS) said that April’s GDP figure was weaker than expected. It was the first time the economy contracted for two months in a row since covid struck, sparking fears that the UK is set to fall into a recession.
Robert Vaudry, managing director at Copia Capital, said: “The UK economy is facing several headwinds. We are already in a bear market. Brexit is coming back to haunt us, with sterling falling against the dollar. Inflation is set to remain high for some time, further fuelled by the conflict between Ukraine and Russia, which is impacting commodity prices.
“The Federal Reserve and Bank of England have been slow to tackle inflation, but are now embarking on programmes of quantitative tightening to reduce liquidity by reducing the amount of assets they own.”
Worrying predictions of a recession can leave client confidence at its lowest. Times such as these also leave investors with the urge to change or diverge off of their plans. But this is where financial advisers can step in and help clients.
International Adviser spoke with Progeny, Kingswood, Aisa International, Sandringham Financial Partners and BRI Wealth Management about how they are communicating with clients over a potential UK recession.
Initial discussions
The idea of a recession can leave a client with a sense of dread and fear.
Therefore, advisers need to make an initial approach to discuss the likelihood of a recession and what it means for them.
James Pearcy-Caldwell, chief executive of Aisa International, said: “We highlighted our concerns in our quarterly bulletin, starting with inflation in July 2021 – we gave a clear description of the way company profits would be impacted by inflation.
“Then, in October 2021, we explained private equity ratios of companies and how the valuations of companies, especially in the US, were too high and that the length of time it would take to obtain original capital back on investment would be stretched further by inflation and interest rate rises.”
Nicholas Sinclair-Wilson, financial planner at BRI Wealth Management, added: “We are indeed talking to clients about the current economic environment and the increasing possibility of a recession.
“As we typically deal with business owners and directors, not only is it useful to update them on how this could impact portfolios, but it is also interesting to garner their views on the current trading environment and how a slowdown could impact their profitability.
“In turn, this allows us to discuss, analyse and project the effect on their personal finances, which could lead to adjustments or revisions in their overall financial plan.”
Tim Sargisson, chief executive of Sandringham Financial Partners, said: “We are not going out of our way to discuss with clients the likelihood of recession and what it might mean for them.
“Many investors are getting used to a variety of political, financial and economic factors, particularly since covid-19. In other words, learning to look through the ‘noise’ to focus on what really matters.”
Recession proof
When the economy is on the decline, it is very unlikely that a client’s returns are going to be amazing.
So, is there a way to shield a client’s portfolio from a recession? Or should clients’ focus on long-term plans?
Pearcy-Caldwell said: “In October 2021, we suggested the plan of countercyclical investment and thematic style stock-picking that would not be subject to sell-off’s and hopefully benefit from inflation. We invested in gold at 15%, for example, and this was a net growth vehicle until we sold it in May 2022 of almost 10%.
“Our overall portfolios went down still as they are still equity investments, but they did not go down by as much as others. To further plan against the recession that is coming, we continue to follow thematic principles as this has proven successful, and to identify those sectors that are not impacted as severely by recession.”
Jess McGuigan, wealth planner at Kingswood, added: “When it comes to a recession, it’s important that clients understand what a recession is, why one occurs and the short-term effects that one may have on their portfolio. It’s even more important for them to remember investing is for the long term and why they need stick to the plan.”
Tracey Evans, financial planner at Progeny, said: “Most clients’ plans are medium to long term and market corrections/recessions are to be expected, so any good planner will be managing clients’ expectations and focusing on the fact that long-term financial planning is geared to withstand instability and to accommodate a range of eventualities.”
Making changes
It is very likely that a financial adviser would recommend against making any changes to a client’s investment portfolio.
Sandringham’s Sargisson said: “Portfolio diversity holds the key to approaching investments and managing risk.
“We stress the importance of thinking about longer-term timescales instead of focusing too intently on short-term events and market fluctuations.
“Investment requires a disciplined approach and a degree of clients holding their nerve if markets fall. Experienced long-term investors know that the worst investment strategy you can adopt is to jump in and out of the stock market, panic when prices fall and try and sell investments at the bottom of the market
“However, concerning market fluctuations may be, it’s important to remember that we have jointly worked hard with clients to formulate a financial plan which is in line with their personal requirements.”
But Aisa’s Pearcy-Caldwell believes that “clients require constant monitoring of portfolios – once a year reviews is completely insufficient”.
“We advocate weekly oversight by our team, and contacting clients quarterly more formally, or at other times when there is a requirement to do so,” he added.
“The portfolios need to have already been rebalanced towards non-cyclical, more cautious-based investments and into thematic areas that benefit from recessions or high inflation, such as the recent increase in some commodity prices.
“However, these areas may already be overheated now, and the opportunity may not be there moving forward. The most important thing is to already be dis-invested from areas that are regarded as luxury or non-everyday necessities as these are the areas that consumers will quickly reduce spending in.
“Sometimes it is more important to know what not to invest in, than to try and predict where growth will be.”
