'Recession definitely part of the discussion'

Portfolio manager talks inflation, market cycle and dynamic tactical asset allocation

'Recession definitely part of the discussion'

Talk of a recession may be hyperbolic but one portfolio manager admits it’s definitely part of the discussion at this stage of the cycle.

Chhad Aul, vice president, portfolio manager, Sun Life Global Investment, said it pays to be mindful of what could cause the next major downturn so that advisors can position themselves accordingly and manage risk. Aul’s base case is that a recession is still one to two years away.

He said: “Other than the financial crisis, most of the other recessions in this post-war period have been caused by inflation getting a little too hot and central banks having to raise rates a little too quickly, which then causes a slowdown in economies that’s a bit more extreme than what they were planning for.

“That’s really where we are focusing in on; where we get central banks raising rates to a point where they cause that next recession.”

He said that for a recession to arrive quicker than his base-case scenario, there would need to be an “upside surprise” in inflation or an acceleration of an extreme risk like trade.

Aul said that with volatility returning to more normal levels after the February correction, a rising–rate environment and the bull market heading, probably, towards its conclusion, strategy becomes important.

He believes that bringing as many active tools to the party will only help investors in the long term.

“We call it tactical asset allocation, it goes by a few names, but in an environment like this where we are getting late in the cycle, how asset classes, equities, bonds in other regions of the world perform relative to each other becomes more volatile.

“So there is an opportunity to both reduce risk through a tactical process or potentially to find areas to add value. That’s one level of asset management that we employ from top down looking at the macro environment but then it’s also the right point in the cycle to be savouring that active management from the bottom up; that stock selection and bond selection from an underlying active manager.

“Our approach has been to bring as many of these tools to bear on the portfolio and you end up delivering the best possible outcome.”


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