So far this year, the FTSE All-Share index has fallen by 3.38%. This might not be cause for great optimism in the best of times, but we are hurtling towards a global recession and it pays to be defensive in this context.
That is according to American billionaire and investment guru, Seth Klarman. The Baupost Group CEO is quoted as saying: “People should be highly sceptical of anyone’s – including their own – ability to predict the future, and instead pursue strategies that can survive whatever may occur.”
A game of survival
So, if it’s a question of survival in an imminent bear market, I will be backing the FTSE over any competing indices over the next 12 to 24 months. That includes the S&P 500, which has bled nearly 14% so far this year.
The composition of the main UK stock market compared to its US counterpart is a key reason for the relatively stable performance of the Footsie this year.
While the London Stock Exchange tends to be home to stocks in mature sectors such as energy, commodities and financials, the New York Stock Exchange has attracted high-risk, high-reward tech firms for several years.
Many of these tech stocks have suffered heavily in light of the US Federal Reserve hiking interest rates to counter sky-high inflation. For example, Facebook parent Meta is down over 50% in 2022 and it recently reported a revenue loss for the first time in its history.
Comparatively, FTSE-listed stocks in the energy and commodity sectors in particular have performed well, with demand for their products continuing to bounce back despite inflationary cost pressures.
Revenge of the old economy
Last week, BP reported Q2 net earnings of $8.45bn, while Shell made $11.5bn in the same period – a case in point for the ‘revenge of the old economy’ theory purported by Goldman Sachs head of commodities research Jeff Currie.
A lack of investment in the mature natural resources market in the post-2008 recovery has led to limited supply growth, hence higher prices today. Factor in increasing energy demand and the result is the extremely healthy balance sheets we see today for those ‘old economy’ companies.
And if Currie’s ‘commodities supercycle’ thematic is to be believed, we are moving into a sustained period of rising demand that could last over a decade.
With a weighting of nearly 40% towards energy, basic materials and consumer staples stocks, I will be investing in the FTSE All-Share to leverage those strong balance sheets and healthy cash flows, as opposed to the tech-heavy S&P 500.
One word of caution – the FTSE 100 fell by 31% in 2008, and the UK economy took more than five years to get back to the size it was before the recession. While the FTSE All-Share seems to be weathering the storm so far, anything is possible in a bear market.