Investors are growing nervous about a possible US economic slump and have been taking steps to protect their portfolios. The US Department of Labor’s weekly jobless claims report yesterday was weaker than expected, while US manufacturing has contracted.
Russ Mould, investment director at AJ Bell, said: “Weak economic data from the US spooked the market and reminded investors there are negative reasons why central banks might cut rates, not simply lowering the cost of borrowing because the rate of inflation is easing. The narrative has changed from rate cuts equating to good news to rate cuts meaning measures to avoid recession.”
Global financial markets are in a state of “heightened anxiety”, agreed Nigel Green, chief executive officer of deVere Group. Japan’s Topix index fell 6.1% today, its steepest drop since 2016, while the MSCI Asia Pacific Index fell 3.4%, mirroring earlier losses in the US.
“With manufacturing and jobs data signalling potential recessionary trends, there’s growing concern that the Fed may be lagging in its response, potentially cutting rates too late to avert a serious slowdown,” he said.
Garry Evans, senior vice president of global asset allocation at BCA Research, said the market is still pricing in a soft landing, but there are growing signs that the global economy is faltering. “A global recession is likely in the next 12 months and stocks typically peak six months before its onset, so investors should be defensively positioned,” he noted.
Against that backdrop, he believes government bonds are the best safe haven. “With the labour market now clearly weakening, we go overweight duration.”
Within equity portfolios, Evans recommended avoiding artificial intelligence and technology stocks and rotating into consumer staples, healthcare, utilities and UK equites.
Investors have indeed been taking profits from tech in recent weeks, Mould said, and “redeploying the proceeds into value stocks that offer slower growth but at a much cheaper price”.
Green concurred: “As fear and uncertainty drive prices lower, astute investors identify undervalued companies with solid fundamentals, positioning themselves for gains as market conditions stabilize. High-quality stocks, typically characterized by strong fundamentals, consistent earnings growth and robust balance sheets, will be in focus as they offer a measure of stability and potential upside even amidst broader market turbulence.”