MEDIA RELEASE: Recession is the most likely economic outcome in the US in the coming months, with investors needing to focus on quality securities and limit exposure to areas such as real estate, according to US-headquartered asset manager, American Century Investments.

Chief investment officer, Victor Zhang, said the banking crisis may accelerate the path to a recession in the US. He also believes inflation may moderate, but still expects it to top three per cent, with GDP also likely to contract.

“Tighter financial conditions and interest rates, in response to elevated inflation and banking industry turmoil, is and will continue to take a toll on consumer spending, credit creation, corporate earnings, and investor sentiment. The compounded effects of nine consecutive Fed rate hikes, raging inflation, supply chain disruptions and soaring interest rates will thwart growth.

“Accordingly, we believe these factors make recession the most likely economic outcome in coming months,” he said.

As recession sets in, US Treasury yields are likely to fall and credit spreads will widen. Inflation may moderate but core inflation is expected to remain higher than the Fed’s two per cent target.

“Given that outlook, investors would do well to consider increasing duration exposure in fixed income portfolios as bonds and strategies with longer durations may offer performance advantages as rates decline.

“Inflation-protection and higher credit-quality strategies appear attractive as well. As the economy gets weaker and corporate earnings deteriorate, credit selection is critical in avoiding fundamentally poor, overly recession-sensitive issuers,” he said.

Mr Zhang said historically there has been no clear winner when it comes to a growth vs. value style of investing during recessions. Instead, during volatile and uncertain environments, investors benefit from overweighting their portfolios to quality growth and value companies with attributes of stable revenues, dependable earnings growth, predictable cashflow, healthy balance sheets, and manageable debt load.

“Conversely, economically sensitive value sectors, such as financials, industrials and energy, tend to lag alongside lowered growth expectations. Additionally, commodities can lose their attractiveness when consumer and industrial demand wanes, and real estate stocks may lag as poor economic conditions and declining consumer demand weigh on property markets,” he said.

Ultimately, said Mr Zhang, an environment of persistent, higher-than-normal inflation can erode investors’ spending power over time.

“That’s why we believe inflation-protection strategies should be core components in fixed-income allocations, even if inflation falls from current elevated levels.

“Within equities and real assets, quality will be key and will help investors safely navigate a recession,” he said.