Schroders' three 'best value' assets as recession risks linger

As market volatility continues and recession risk remains, are equities an attractive proposition? Should fixed income exposures be increased? Which other types of assets are attractive amid ongoing uncertainty?

To help answer these questions, I sat down with Sebastian Mullins, Head of Multi-Asset at Schroders Australia. His team allocates investments across multiple asset classes including equities, fixed income, infrastructure, and others to help deliver returns above inflation throughout market and economic cycles.

A 20-factor model of recession risk

Debate continues to rage around the likelihood of a recession and whether markets will have a “hard” or “soft” landing. But Mullins suggests the way many market-watchers, including the US Federal Reserve, think about recession risk is too simplistic in concentrating solely on 3-month and 10-year government bond yields.

“It’s better to have multiple indicators within a model, to give you a better understanding of how recession probability is changing, but to also give you a clearer timeline,” Mullins says.

Schroders’ primary model of recession risk comprises 20 individual factors categorised across the following three buckets:

• Inflationary – This looks at whether the economy is overheating, a short-term measure that usually leads a recession by one to two years,
• Monetary policy response – This considers what central banks are doing to slam on the brakes, this typically looks over six to 12 months.
• Short-term macroeconomic and market impacts – Looking at what is starting to break in response to those policy settings.

In combination, these provide a gauge of both the likelihood of a recession and how close we are to the endpoint.

What is the model telling you now?

Mullins notes the model has accurately predicted recessions as far back as 1990, with more than 40% of the 20 indicators being triggered on each occasion.

“Right now, it’s at 50%, which is quite concerning. That would keep us cautious on risk assets,” Mullins says.
“That said, it’s fallen from a high of 65% in April this year. So, the trajectory is positive, as it’s falling, but the model is still triggered.”

Having ramped up the risk indicator during the banking crisis of last April, the model then indicated recession as an imminent threat.

“That’s all switched off now. It’s still saying, “Watch out, there’s a recession” but it has pushed that indication out by around six months,” Mullins says.

Consumers defy expectations

Mullins regards the strength of the consumer as one of the most important factors currently. He notes that while economic growth is slowing and higher interest rates are affecting consumers, “everyone has been surprised at what has been priced in.”

“Most central banks globally have had the most aggressive rate hiking cycle of the past couple of decades but you're not seeing anything cracking or rolling over. Growth is slowing but you’re not seeing a collapse,” Mullins says.

He points to the latest retail sales figures from the US, which beat all expectations. Mullins sees a similar scenario playing out in Australia, where despite mortgage interest rate pressures and tightness in the rental market, “the overall economy doesn’t seem to be rolling over.”

Top 3 assets from here

Mullins singles out investment-grade credit, especially in Australia, which is yielding around 6%. “And with very high-quality companies, we don’t think it’s going to go bankrupt,” Mullins says.

In equities, Mullins notes that returns are “challenged” in a global sense but sees relative value in both Japan and Australia, the latter buoyed further by franking credits.

And finally, his last pick is one he concedes is “boring” but is currently impossible to ignore: "Cash is paying you something now, you can sit there and get paid to wait for better opportunities”.

Click on the player below to watch the full interview.

Time codes:

• 0:00 - Introduction
• 1:20 – The three buckets of Schroders’ recession risk model.
• 2:27 – What the model is telling us now.
• 3:29 – How the risk model fits into Schroders’ investment process.
• 5:30 – Economic resilience has surprised everyone.
• 7:50 – Why the consumer is so important.
• 8:52 – The million-dollar question – are we at the top?
• 10:45 – Assets and sectors offering value from here.
• 12:35 – Schroders’ 3 asset class picks.
  
  

Take advantage of opportunities wherever they exist

With the flexibility to invest across a broad range of asset classes, we aim to help investors grow their wealth with a reduced risk of losing money when markets fall. Visit the Schroders website to learn more.

Managed Fund

Schroder Real Return Fund - WC

Multi-Asset

View