Growth, recession and the economics exam that matters most

Why recession is a risk worth studying

Investors regularly face testing situations, with asset prices reacting (at least in the short term) to challenges ranging from national and international politics to inflation surprises and industry-specific shocks. Most of these tests are manageable, with markets historically able to absorb short-term political and economic turbulence.

But there is one test that investors cannot afford to fail: economic recession. Financial markets cannot easily ignore a meaningful, sustained hit to economic growth. When economic growth contracts, two things happen simultaneously. One, corporate earnings naturally come under pressure as growth and economic activity stall. Two, the multiples investors are willing to pay for those profits also fall as confidence fades and sentiment darkens.

Therefore, recessions represent the biggest challenge investors can face. I believe that getting our view on this right is the single most important thing we could do for our clients.

Lessons from history: balancing risks against potential rewards

Recessions are obvious with hindsight, but rarely so in real time. They are often born amid periods of high confidence and apparently healthy economic conditions, but this doesn’t mean that every time the economy is growing, an economic recession is imminent. Indeed, it is often joked that economists have predicted 10 of the last three recessions!

While the past is an unreliable guide to future outcomes, economic history is still the closest thing investors have to a set of past exam papers. Over the long course of history, economies have grown, productivity has advanced, and businesses have invested, adapted and innovated. Progress has rarely followed a straight path, but the overall direction has been one of long-term expansion.

Recession is always a setback – sometimes a debilitating one, such as in 1929 or 2008. The path back to growth can vary in speed and shape, depending heavily on the root cause of the downturn. Nonetheless, modern market economies have always historically recovered from recessions over the long term.

What’s more, there is strong evidence to suggest that the frequency with which modern economies face recessions is changing…

Taking attendance: recessions are becoming less frequent

Thanks to a long history of economic data, there is evidence to suggest that recessions are far less common today than in the past.

For a worked example, let's turn to a familiar case study: the US economy.

The US economy spent roughly half the first four decades of the 20th century in recession. It then spent one-fifth of the next 60 years in recession, before plummeting to one-tenth in the first two decades of the 21st century. I’d argue that this is one of the most important but underappreciated economic developments of the past century.

See me after class: what does this mean for markets?

Our open-book exam on economic understanding is not about predicting the next recession with perfect accuracy. Instead, it’s about managing the risks and seeking the opportunities across a range of possible outcomes.

Markets evolve alongside economies – albeit with long and variable lags – and today’s less volatile developed economies have generally produced less volatile earnings streams. For long-term investors in particular, this is welcome news.

Valuations, which estimate the fair value of financial assets, remain important. However, as we’ve highlighted above, the underlying economic regime has changed, making us cautious about any assumptions that equity valuations will return completely to their long-run averages (‘mean reversion’). Today's leading companies operate in a less volatile economic environment, with less frequent recessions. Given the relationship between recessions and earnings growth, this has led to more resilient earnings streams than many of the businesses that dominated previous decades. If the quality of the underlying asset improves, why should we expect the valuation multiple to remain unchanged?

Recessions remain a key risk to multi-asset investors, but if they are less frequent than before, this should give long-term investors confidence as well as perspective.

Importantly, risk – including but not limited to economic risk – cannot be eliminated. We wouldn’t want it to be: we need risk in order to create the potential for reward.

We aim to build portfolios that can withstand the ups and downs of economies and markets, while continuing to participate in growth and expansion.

Our core investment views

Our investment process is grounded in data and evidence, with our positioning informed by a range of factors, including policy developments, inflation trends and the outlook for economic growth.

Below, we recap some of our highest-conviction investment views.

We still prefer equities over bonds, but with a more measured allocation

We have maintained an overweight position in equities, to varying degrees, since late 2023. In June, we maintained our overweight equities stance, but reduced the magnitude of this position versus bonds, which we continue to value for their income potential and ability to provide support during periods of weaker economic growth.

This shift reflected signals from central banks and the potential implications for markets. We continually monitor for any further tightening in financial conditions or signs of changing capital expenditure plans in the technology sector, both of which could affect the economic growth outlook. For now, we continue to expect growth to remain resilient, supported by artificial intelligence (AI)-related investment and healthy corporate earnings, which we believe should be supportive for equities.

We maintain a broad approach to portfolio diversification

Diversification remains a core element of our investment approach. While government bonds continue to play an important role alongside equities, we believe they may be a less dependable diversifier than they have been historically in an environment of persistently above-target inflation and higher interest rates.

As a result, we continue to draw on a broader range of diversifying assets, including different currencies, gold and liquid alternatives where appropriate for client portfolios. By maintaining diversification across a range of asset classes, we seek to build portfolio resilience across different economic environments. This flexible approach helps us to manage uncertainty while positioning portfolios to navigate both opportunities and challenges as they emerge.

Emerging market equities remain our preferred route to the AI theme

Emerging market (EM) equities have benefited from strong investor interest in AI throughout 2026. The region plays a central role in the global semiconductor supply chain, supporting our decision to increase exposure to EM equities earlier this year.

Market performance has been more volatile in recent weeks as investors reassess the valuations of AI-related businesses. Despite this, we continue to view EM equities as an attractive and diversified way to access the improving earnings prospects and long-term growth opportunities associated with AI, often at more compelling valuations than developed markets.