N’Gunu Tiny on investing during a global recession

CEO of Emerald Group, investment expert N’Gunu Tiny on investment strategies that will carry you through a global recession.

With the world sliding into a potential global recession, I wanted to cover some of the investment strategies that work for me. I believe it’s possible to control your investment narrative and ensure that you continue making money even during the toughest economic times. It’s all about the planning decisions you make.

First, let’s look at why economists are saying that a global recession is now ‘highly probable’.

Why are we on the brink of a global recession?
The rapid spread of coronavirus from its starting point in Wuhan, China to outbreaks in a growing number of countries, continues to adversely affect global economies. One of the most significant recent developments is the President of the United States’ address to the nation on 11 March 2020.

Travel from 26 European countries to the US is now banned completely for 30 days, in a move which has spooked the markets around the world. In a bid to stop COVID-19 spreading further into America, the decision has been made to ban European travellers. This doesn’t include travellers from Ireland and the UK.

Presumably intended to allay fears of a global recession, the announcement has so far had the opposite effect. During and just after the announcement, Asian stock markets and Wall Street futures trading continued to freefall into the red.

Economic impact across the rest of the world
In rest of the world, events are moving fast. Italy has now shut down completely, with all 60 million people under lockdown. Other countries are likely to follow suit as the virus continues to spread quickly. The World Health Organisation (WHO) have now declared it a pandemic, which is also affecting general market confidence.

Cases of COVID-19 now stand at more than 126,000 people, and at least 4,600 deaths globally. China is still top of the list in terms of number of victims, but new cases in the origin country and in South Korea are now falling. In the US and Europe, they continue to rise, however, with the US State Department officially telling US citizens to “reconsider” travelling overseas.

As part of the President’s package, there is financial assistance available for people who can’t work, are under quarantine or are looking after ill people. However, regardless of the intention of the announcement, it doesn’t allay fears of a total shutdown of major economies, which could destroy supply and demand simultaneously.

This can be seen with market activity during the live address, and immediately following. Asia Pacific markets fell into selling off mode. The Nikkei fell 5.4% in Tokyo and the ASX 200 in Sydney fell by 7.2%. The FTSE 100 fell by 5.8% the day after.

How to invest strategically during a global recession

In short, global markets are in turmoil and COVID-19 is causing many investors to turn to safer assets, such as gold and government bonds. Given these challenging circumstances and the likelihood of much more uncertainty ahead as the world faces up to coronavirus, I wanted to outline how I manage investments to minimise losses.

While the situation right now is uncertain, investing follows seasonal cycles. Understanding the ebb and flow of these economic cycles helps investors to prepare. The problem comes with complacency when things are going well. It’s tempting to ride the wave of success without planning for it crashing against the shore. My fundamental investment strategy has always been based on properly understanding business cycles and economics and planning accordingly.

At the Emerald Group, we always invest cautiously with the words of one of the most successful investors in the world, Warren Buffet, as our mantra: “Rule number one: never lose money. Rule number 2: don’t forget rule number one…”

Investment strategies to consider

Two basic ideas govern the way we choose to invest. We are first and foremost Business Cycle Investors (BCI). Secondly, we follow something called Dynamic Asset Allocation (DAA). Here’s how these two investment strategies guided our investment decisions in 2019.

1. Dynamic Asset Allocation (DAA)

This is an extension of Strategic and Tactic Asset Allocation, which are used by wealth managers on multiple clients. DAA means being less restricted on what you buy and sell within your investment portfolio. Investors can withdraw entirely from any asset class if it is the right decision to make. Below is a comparison.

a. Strategic Asset Allocation is built around risk profiling. It’s very sensitive to business cycles and yields anticipated returns of 3–6%.

b. Tactical Asset Allocation is a core approach to building investment portfolios and is less sensitive to business cycles, with anticipated returns of 5–8%.

c. Dynamic Asset Allocation is fully flexible, working with business cycles by anticipating when to exit/deploy markets with anticipated returns of 12%+.

2. Business Cycle Investing (BCI)

This investment approach has economic theory at its core. Economic cycles can be likened to the four seasons, in that they tend to repeat and take turns. Investors who follow this way of investing focus on the big picture performance of sectors, rather than individual stocks. It’s a common sense model which dictates different investment decisions according to the wider economy.

Depending on where the business cycle stands, and this differs between different markets, using these methods of investment help to determine how best to allocate. In early and mid-stages of the business cycle, investors should favour equities, and in later stages shift away.

How investment worked for us in 2019

In 2019, our investment committee decided that defensive assets were the best allocation, as we were entering late stages of the business cycle. These included government bonds, gold, corporate bonds, cash and private secured credit. All of these have performed well for us during the last 12 months, with a return of 24% on gold, 7% on corporate bonds and 15% on private credit. Government bonds are beginning to reap the rewards as well and cash creates a balanced support for our portfolio.

If you have the same investment approach as me and believe that economic cycles are similar to the seasons every year, then your success lies in early preparation. Of course, you may miss some returns, as we did in 2019 with equities, but the best strategy is about preparing for volatility where possible.

Moving into 2021, much will depend on the eventual impact of coronavirus on global markets. I think that gold, cash and government bonds will continue to perform well throughout 2020, and we’ll see an increase in investors shifting away from equities into these sectors. If the economy continues evolving at its current pace, by 2022 we will have seen equities heavily hit, Subsequently, it will then be a good time to rotate back into these sectors.