The latest data shows that the UK entered a recession in the second half of 2023. Understandably, news of an economic contraction has the potential to worry investors and destabilise markets.

However, is a UK recession exclusively a bad thing?

Currently, there are factors which should comfort investors. Firstly, this recession appears to be mild in nature. Secondly, there is broad consensus that a UK recession has already been priced into the markets, going some way to neutralising its potential impact on returns. Normally, during a recession, asset prices will decline, so a priced-in recession should mean that there is less volatility to come, helping to stabilise future returns.

Furthermore, with a contracting economy, the Bank of England will feel additional pressure to cut interest rates. Lower interest rates mean lower borrowing costs for companies, leading to more affordable investments and potentially enabling their growth. Lower interest rates also encourage consumers to borrow and spend more too, increasing economic activity within the UK. Markets therefore generally respond positively to interest rate cuts.

Predicting the exact timing of a rate cut, however, remains an imperfect science. Whilst rate cuts in the near future seem more likely than not at the moment, it’s still not a given. At the February meeting of the Treasury Select Committee, the governor of the Bank of England, Andrew Bailey, maintained that whilst he too anticipates a rate cut this year, he could not say by how much and when. He also went on to say that the UK is already showing signs of recovery from its mild recession with consumer spending up in January - reducing the pressure on the central bank to lower rates.

Still, despite the current UK recession arguably having the potential for less impact than previous contractions, any GDP contraction should never be blindly ignored, nor should they be immediate cause for concern. While current economic conditions are important, it remains crucial, in our view, to focus on the long-term and not be distracted by short-term noise.

In using Square Mile’s long view investment philosophy, even if the UK’s recession does have a more detrimental impact than anticipated, we believe we are well positioned to weather any economic conditions. That’s because our philosophy is centred around:

1. A long-term perspective

Using a 7 to 10-year horizon for our investments means we do not make decisions based on knee-jerk reactions to short term events that, over the long term, do not yield meaningful results. Instead, remaining invested over a long-term period is when healthy compound returns are historically achieved - regardless of bumps in the road along the way.

2. A multi manager approach

By adopting a multi manager approach, it’s possible to pick ‘best of breed’ funds, allowing us to structure portfolios more likely to perform. Our 20-strong team of analysts assess funds over appropriate time frames and rate the ones they believe are capable of meeting their investment objectives. Furthermore, they conduct ongoing monitoring of funds held too, to ensure that our knowledge remains current and up to date.

3. Diversification

Through diversification, we ensure that exposure to one asset class is limited. History has shown that it’s almost random which asset class will be the best performer from one year to the next, so it is diversified portfolios which are able to provide value over the long term, with much lower volatility too.

4. Investing in quality

Throughout our rigorous research process, our aim is to identify high-quality companies which can tolerate economic weakness. It means that, despite a recessionary backdrop, it's possible to minimise downside risk, while also enjoying upticks when economic conditions are more favourable.

Interested in knowing more about Square Mile's investment philosophy and solutions, get in touch or find out more about how we can work with you.

***

This article is only aimed at professional advisers and regulated firms only and should not be passed on to or relied upon by any other persons. It is not intended for retail investors, who should obtain professional or specialist advice before taking, or refraining from, any action on the basis of this report, remembering past performance is not an indication of future performance. Square Mile Investment Services Limited (“SMIS”) makes no warranties or representations regarding the accuracy or completeness of the information contained herein. This information represents the views and forecasts of SMIS at the date of issue but may be subject to change without reference or notification to you. SMIS does not offer investment advice or make recommendations regarding investments and nothing in this report shall be deemed to constitute financial or investment advice in any way and shall not constitute a regulated activity for the purposes of the Financial Services and Markets Act 2000. This report shall not constitute or be deemed to constitute an invitation or inducement to any person to engage in investment activity and is not a recommendation to buy or sell any funds or investments that are mentioned during this report. Should you undertake any investment activity based on information contained herein, you do so entirely at your own risk and SMIS shall have no liability whatsoever for any loss, damage, costs or expenses incurred or suffered by you as a result. SMIS does not accept any responsibility for errors, inaccuracies, omissions, or any inconsistencies herein.

Square Mile Investment Services Limited is registered in England and Wales (08743370) and is authorised and regulated by the Financial Conduct Authority (FRN: 625562).