Economists are debating not whether Britain will have a recession but how long it will last and how deep it will be. Investors are therefore right to be nervous about where they put their money at the moment, but there is no straightforward answer.
Counter-intuitively, they should not immediately park their money in the most defensive fund they can find or retreat to a low-rate savings account. Markets look ahead, pricing in a recession before it begins and starting to recover long before the impact is truly felt, according to Darius McDermott of Chelsea Financial Services, a fund shop.
“A classic example of this was in March 2009. The British economy was in a big recession but it was also the best opportunity to invest for a generation – and the stock market did very well in the second half of 2009,” he said.
A stock market fund that invested in undervalued companies primed to rebound quickly might be the best option, Mr McDermott added.
They include the £750m Schroder Recovery fund and the £1.7bn Jupiter UK Special Situations fund.
These funds own beaten-up stocks in the banking, mining and oil sectors which could bounce back once investors think that the bulk of the bad news for the economy has already emerged.
For those who want to hedge their bets a little more, he suggested the £680m Evenlode Global Income fund, thanks to its geographical diversification and preference for companies that lead their industries and have high barriers to entry in their sectors. Its largest holdings include Unilever, the consumer goods giant, and Reckitt Benckiser, the household products firm. Both have excellent brands and should see strong sales even during a recession.
For pessimistic investors who expect more pain ahead for the economy, possibly driven by a second wave of coronavirus and another lockdown, the £850m BBGI Global Infrastructure investment trust is a good option.
“Infrastructure companies are relatively unaffected by economic conditions and will perform well even in a recession and continue to pay dividends,” said Luke Hyde-Smith of Waverton Investment Management.
The fund has investments that operate in critical areas of the economy, such as schools, roads and prisons, which will experience business as normal regardless of an economic downturn.
An even more defensive option would be the £630m M&G UK Inflation Linked Corporate Bond fund, said Eduardo Sánchez of Square Mile, the fund research group.
It invests in bonds from companies that are unlikely to default, with interest payments linked to inflation, which adds another layer of protection for investors.
“If we have another spike of volatility and another market sell-off similar to the one in March, there will not be many places to hide. This is a unique fund that aims to protect capital value and income from inflation,” he said.
It also owns British government bonds, which are regarded as a safe haven when markets go south.
The fund has been a top performer in its sector in the past five years whenever markets have crashed, Mr Sánchez said.