How to invest if you fear another recession
IN THE aftermath of Friday night’s announcements on the stress tests, the big issue remains whether they will make any difference to confidence and to the fragile recovery.
We won’t know immediately. But Pau Morilla-Giner, senior portfolio manager at London and Capital, says the probability of a double dip is growing, regardless of the health of the banks. He says the only area left to go down significantly is manufacturing activity, but that other leading indicators point to deceleration in the West.
Over the past year, we have gone from a situation characterised by large amounts of stimulus and completely dissipated inventories, to an environment where companies are experiencing weak final demand with inventories back to the same levels as they were in 2008.
Morilla-Giner says government austerity measures will have a substantial effect on GDP and he goes on to point out that the only way we would see growth in this environment is: a) if the consumer decides to save less (highly unlikely), b) if companies spend more (also highly unlikely as they’re already stretched and cautious), or c) if we export our way out of difficulties (you can only export up to a certain point).
Having gone from a cyclical recovery to a scenario of subdued growth, Morilla-Giner argues that not much has to go wrong before we enter danger territory. And once we’re here, all it would take is a policy mistake of governments hiking rates too soon over the next 12-18 months, and we would almost certainly face a double-dip.
So what should investors do? Morilla-Giner advises looking at the large, global manufacturing companies with exposure to emerging markets and says investors could be very happy in pharmaceuticals during this next slow-growth cycle. AstraZeneca is one of Morilla-Giners favourite medium-term bets as it has very low leverage (so if rates were to go up, it wouldn’t have refinancing problems) and it has been expanding aggressively in Brazil and Asia. Additionally, AstraZeneca gives you a five per cent dividend yield, and it has a good free cash flow yield of nine percent which also makes it a resilient play. It’s certainly an interesting view.
Louisa Bojesen is a co-anchor of CNBC’s European Closing Bell.