A global recession could be just two years away so the prudent course of action for investors is to increase their defensive investments in 2018, according to John Stopford, co-head of multi-asset investments at Investec Asset Management.
Mr Stopford said he does not believe a recession is imminent, but added the economic indicators he trusts point to a downturn in approximately two years' time.
He said with valuations currently high across most asset classes, now is the time to take profits on economically sensitive asset classes and move capital into defensive assets.
Mr Stopford, who runs the £458m Investec Diversified Income fund, said he has been reducing his exposure to high yield bonds. He said that over the past year he has approximately halved his exposure to those assets, from 20 per cent to 10 per cent.
High yield bonds are those which require an investor to take the most credit risk.
Those assets tend to perform well when the economy is growing, according to Mr Stopford, as the positive economic outlook increases the likelihood that the companies issuing the bonds will be able to repay the money.
Watch John Stopford give his outlook for sterling in 20018 here.
Mr Stopford said he has also been investing in the Japanese currency, the yen, as a defensive position as this often performs well in times of economic strife.
This is because the long-term low interest rates in Japan make it very cheap to borrow yen, he said.
Defensive investors then take the yen they have borrowed, and use the capital to buy US government bonds, he added.
The yield on the bonds is higher than the cost of borrowing the yen, and the US dollar tends to perform well during periods of market strife.
This means the investor profits both from the higher yield on the bonds relative to the interest rate on the borrowed yen, and the fact the interest paid on the bond is in dollars, a stronger currency than the yen, according to Mr Stopford.
All of the borrowing yen, and repaying yen borrowing with money earned overseas (from the bonds), pushes the value of the yen upwards in times of market strife.
This is why some investors buy the yen in advance of a market downturn in order to profit from its rise in value when the downturn happens.
David.Thorpe@ft.com
