Following a sharp reduction in output, the global economy entered a transitory stage at the start of the summer.
But this is no ordinary recession. Over the past three decades or so, economic recovery following recessions has typically been led by Western consumers and their credit cards. This time around, the level of personal debt in the West is already very high and individuals are reluctant to take on more.
Net mortgage lending has fallen to its lowest level since October 2000 and companies are also focused on reducing debt levels, hence loans to non-financial firms are weak.
Western consumers therefore seem unlikely to embark on the traditional credit-fuelled spending spree. The onus for driving global economic growth has shifted to nations with budget surpluses, such as China, which do not have such high propensities to consume. Consequently, the growth in global demand looks set to remain lacklustre.
As any meaningful economic recovery requires more spending and borrowing from Western consumers, policymakers need to make their stimulus packages bigger to offset the effects of a reduction in debt levels.
In both developed and developing worlds, governments are playing a far bigger role in determining economic activity. Businesses exposed to infrastructure investment should benefit from this trend.
At the same time, as the balance of global growth tilts more toward China, India and Brazil, demand for basic resources and commodities – as a proportion of global growth – will rise. These investment areas therefore look attractive in the medium to long term.
To finance economic stimulus, policymakers have resorted to printing money to stabilise the economy, which has historically given rise to higher rates of inflation. In such an environment, investors would do well to angle their portfolios towards “real” investments such as commercial property, gold, equities and, as mentioned, commodities.
Within equities, we like large-cap global defensive companies such as engineering and basic industrial firms. Examples include Johnson & Johnson and GlaxoSmithKline.
In addition, commercial property is a real asset likely to produce good medium to long-term returns. It is also attractively valued at present, with yields at a cyclical peak.
Corporate bonds no longer offer the returns they did in late 2008 and while opportunities still exist in this area, I am now focusing more on high-yield corporate bonds.
I am cautious on sterling and on any assets priced in pounds, owing to continuing quantitative easing and economic unrest. A long period of low interest rates is unlikely to help our currency.
With this in mind, I have increased my investments in emerging market bonds. These are attractive owing to the stronger economic fundamentals, healthier current account balances and public sector finances of many emerging market countries relative to the Western world.
Despite tentative signs of recovery I expect weak economic growth to continue for some time. In such an environment, the key to successful multi-asset investing lies in constructing a diversified portfolio of high-return assets in order to maximise reward while taking on a level of risk appropriate for each investor’s circumstances.
David Jane is head of multi-asset at M&G