How will China prepare for a recession?

Given the late-cycle phase of the US economy, investors wonder when the next recession will hit and how best to prepare for it. The current question is whether an escalation of the trade dispute between the USA and China could increase the risk of recession. In order to be better equipped for the challenges in this environment, the experts at J.P. In its long-term capital market outlook “Long Term Capital Market Assumptions” (LTCMA for short), Morgan Asset Management has examined the recessions in the industrialized countries over the past 40 years and derived various scenarios from them. A total of four recession scenarios with different possible triggers were identified. The focus was also on how the respective market reactions are.

Firstly, there are recessions characterized by corporate caution, which pose particular risks for the equity and bond markets, but also for the credit markets. The US dollar could develop slightly positive in this scenario. Changes in the control system, for example, are conceivable as a possible trigger.

A second scenario shows recessions caused by monetary tightening. In this environment, emerging market investments suffer while the US dollar is very strong. Equity and credit markets are likely to trend negative. Inflation could be a trigger.

The third scenario describes recessions after a trade dispute. These are likely to have a non-linear impact on short-term growth and inflation, with emerging market investments being particularly hard hit. The outlook for bonds and the US dollar is slightly positive in this scenario. Customs duties, for example, are triggers.

The fourth recession scenario hits a consumption-driven economy like the US: a weaker demand impulse following consumer restraint will likely keep inflation subdued. The bond markets could be slightly positively influenced overall, and the US dollar could also trend a little stronger. One trigger for this scenario is a deterioration in the labor market situation.

“It is true that recessions will always be associated with challenges. However, the intensity and type of market distortions can vary greatly, ”emphasizes Tilmann Galler, capital market strategist at J.P. Morgan Asset Management. “The results show very clearly that recessions are not always characterized by stock sell-offs, loan defaults and a flight to quality that drive government bond prices higher. But even after a massive downturn, the markets can recover very quickly "

Be prepared for the later phase of the business cycle

How can investors increase their portfolio resilience to prepare for the next recession? “The positive trend can be seen that investors generally seem better equipped for a recession than in the past: The diversification of portfolios has increased significantly, these have been structured according to different needs and different asset allocation solutions have been included. However, there are still some risks, ”explains Galler. In principle, investors with higher equity allocations are likely to be hardest hit by a recession. However, stocks also have the greatest potential for recovery. In the strategist's opinion, equities should therefore be an integral part of the portfolio even in recession scenarios. However, it is advisable to be able to react dynamically to changes in the market. “In particular, actively managed, flexible mixed funds can help improve the resilience of portfolios in the long term,” explains Tilmann Galler.