Two Capital Group portfolio managers say that while a recession is inevitable next year, it will not be a deep or a particularly long one.
The country has been struggling with high inflation for more than a year and to combat it, the U.S. Federal Reserve and other global central banks have been raising interest rates. In America, the Fed has been aggressive in its actions prompting many to anticipate a recession in the coming weeks.
Speaking at the Capital Group’s monthly webinar, Mike Gitlin, head of fixed income at Los Angeles-based Capital Group, said the recession is a by-product of the fiscal and monetary policies that took place during the pandemic.
“We ran into COVID where we closed the economy, we hampered the supply chain and we came out of that with more fiscal stimulus cheap money and lots of inflation,” he said. “Markets are cyclical and we are in the late stages of the current economy and as we go through that, there is a high probability that we have a recession next year.”
The firm does not anticipate that this recession will not be a terrible one, nor are they the only firms making this prediction.
“We think it will most likely be a mild one,” Gitlin said. “We are not unique in that; I think the 2023 recession is the most forecasted recession in the last 50 years.”
In anticipation of the turbulence continuing, Jody Jonsson, equity portfolio manager, spoke about how she builds her portfolio and the strategies she employs. In all she invests in about 40 stocks and divides them into three categories: supertankers, moonshots, and experimental companies.
The first group are those stocks that are reliable regardless of what is going on in the markets. They are self-financed in that they do not depend on the credit or equity markets. They also have strong cash flows and balance sheets. These stocks occupy the top half of Jonsson’s portfolio.
“These are companies that can just plow ahead in stormy seas and calm seas,” she said.
Moonshots, on the other hand, carry more risks yet they have a higher reward. They are companies whose outcome depends more on binary outcomes such as a drug approval or a new product, according to Jonsson. She relies on Capital’s expertise to help her make decisions about the ideal company to invest with.
“We feel we might have better information about that through our own proprietary research, but we also have to be humble about the odds of success on those,” she said. “As a result, I try to build portfolios that are generally lower volatility.”