Slow down, but keep moving

As a US-led economic slowdown preys on global markets, should investors attempt to "recession-proof" their portfolios?

Calling a recession in the US is the responsibility of the National Bureau of Economic Research, but against the backdrop of a downturn in the housing market, weak consumer spending - the driving force behind the US economy - and equity market volatility, some analysts believe one could already be under way.

While some experts believe that booming emerging economies are no longer dependent on the US to drive growth, a phenomenon known as "decoupling", others think the old adage that when America sneezes, the rest of the world catches a cold, still rings true.

Even after the recent growth of the booming BRIC (Brazil, Russia, India, China) economies, America remains a $9 trillion economy, while China's economy comes in at $1 trillion and India at $650 billion.

Chinese total spending is still about 10 per cent of that of the US, while the equivalent figure for India is just six per cent. So what is the outlook for the global economy, and where could investors turn to hedge against recession and falling markets? We asked a panel of experts:

Andy Gadd, head of research at financial adviser Lighthouse Group, remains a fan of UK equity income funds for more cautious, long-term investors, despite a generally poor performance last year - largely attributable to overweight positions in the banking sector which was hammered by the credit crunch.

"If investors are concerned about a possible recession, then many high-yielding stocks are in defensive sectors and exposure to FTSE 100 stocks may be seen as defensive as many are multi-national with income sources from a number of global markets."

Investors could also increase their exposure to bonds, which generally benefit as interest rates fall. Funds to consider include M&G's, Invesco Perpetual's and Old Mutual's corporate bond funds.

Jim Wood-Smith, head of research at private client fund manager Williams de Broe, believes there will be a sharp rise in the popularity of "wet funds", as global water shortages begin to take hold, new openings in advertising (due to expanding online social networks, video-on-demand and mobile phone advertising), and continued rapid growth in Asian emerging markets, all of which will produce investment opportunities.

"The messages for 2008 are selection and effective diversification," he says. "The gulf between the winners and losers will widen, for both asset allocation and stock-picking."

Jason Britton, co-fund manager at multi-manager specialists T Bailey, says: "Nothing is recession proof, but some countries, like India and Brazil, have only two-three per cent exposure to the US market and are growing rapidly.

"That is not to say emerging markets are not risky. We think China is overheated at the moment. Look to funds that give you significant exposure to a wide range of global markets - not just one country or the limited BRIC funds."

Peter Bickley, director of economics at Tilney, the UK arm of Deutsche Bank Private Wealth Management, says investors should consider hedge funds, a sector that returned around 10 per cent last year.

"This is the point in the economic cycle when they (hedge funds) come into their own; they are a classic late-cycle asset, when straight equity might find life tougher and more accident prone.

"Now we're increasing exposures in higher risk portfolios where risk isn't such a consideration, because the returns relative to other asset classes will be good in 2008."

He urges investors to go for funds of hedge funds to reduce risk.

Angus Campbell, head of sales at spread betting firm Capital Spreads, says "shorting" - the practice of borrowing a security, such as a stock, selling it in the expectation its price will drop and repurchasing it to pocket the difference - gives investors the ability to profit in bull or bear markets.

"It will be very difficult for the booming BRICs to keep the global economy afloat since a large amount of their success depends on the strength of America.

"If you don't like the thought of selling something you don't own in order to make a profit, then you would be best off keeping your money in cash."

Rebecca O'Keeffe, head of fund management at Interactive Investor, advises risk-averse investors to consider gold or commodities more generally.

"While you can invest in gold directly, you can also invest more generally in a commodities fund."