George Soros's recent warnings of a global recession did little to help the new year hangovers of fund managers. Playing on a general feeling of unease that the wolf must finally be behind the door, Soros said the global economy will see a landing that is “bouncy and hard”.
IFAs agree it would be foolish not to heed the warnings from someone of the sta ture of Soros but few fully endorse or want to believe his gloomy predictions.
Soros has undoubtedly got things spectacularly right in the past, most famously with his wager against sterling in 1992. Hargreaves Lansdown head of research Mark Dam pier points out that while this is certainly true, he has also had poor returns in the last couple of years, which tend to be forgotten.
In response to Soros's comments, Michael Philips partner Michael Both says: “The very easy profits that have been available to equity investors will no longer be around. The danger is that people will pull out altogether and that it then becomes a self-fulfilling prophecy.”
The prevailing view among IFAs is that Soros's prophecy is overly pessimistic. Legg Mason inv estment manager Richard Neill says: “While there is more pain to come, we are not going along with the doomsday scenario.”
Like many others, he bel ieves that the end of the year might see the US economy making headway, even if the first half of the year might be tough and perhaps even in recession.
Chartwell investment manager Tim Cockerill says: “The consensus does not paint as bleak a picture as Soros does.
“Even if IFAs as a whole do not endorse the strength of Soros's prediction, many do accept there is likely to be a small recession in the US.”
He also points out that there are “different degrees of softness”.
Dampier says that, given the imbalances in the US economy, a recession is not a difficult call to make. He also notes that, given the performance in recent years, 1 to 2 per cent growth might feel like a recession when it is not.
His advice to clients has not dramatically changed although he feels many other IFAs should change theirs. He beli eves that just follow-ing the highest-performing funds is wrong and that clients' expectations, particularly in technology stocks, have been unrealistic.
So what should IFAs be saying to their clients? As always, IFAs should advise clients that they must have a balanced portfolio.
Always be prepared for the bad years, says Dam pier, tell ing his clients that they should keep 25 to 50 per cent in cash.
Bates Investment Head of Research James Dalby agr ees but doubts that IFAs will encourage a big cash wei ghting in general. Nor does he see IFAs steering clear of the US. “IFAs plan portfolios in global terms. It is possible we will go for a lower US weighting but I do not imagine that IFAs will avoid the US en masse.”
Neill also believes the US market is too big for wholesale repatriation.
Dalby considers the res ponse to concerns is to “diversify both geographically and sector ally”.
But perhaps fine-tuning will not be enough and we will not be able to insulate ourselves against the effect of a US recession. Cockerill says “If Soros is right, it will not just affect the US but we will all be stuffed.”
Dalby believes a hard landing is already factored in to many share prices so he does not believe the stockmarkets will be affected that much unless a recession is longer than expected.
Unlike many IFAs, Both takes Soros's comments at face value and considers it dangerously complacent not to heed the warning. As well as steering clients away from tracker funds, he is adv ising them to batten down the hatches for a recession by considering debt reduction and taking full advantage of tax breaks.
But Cockerill says: “I cannot imagine that as a result of what Soros has said that any IFA would be changing the advice that they would have given two to three weeks ago.”