Chris Watling's portfolio preparation guide for a 2023 global recession

Hans Lee

Livewire Markets

Last week, London-based economist and founder of Longview Economics Chris Watling walked into a pub and ordered three pints of beer. The barman poured the pints and promptly asked Watling for £30. There was a pause, as the two made eye contact before eventually acknowledging the extreme prices for beer. 

But it's not just beer and bars that are going through a rough time. The other B - the Bank of England - is in a policy tussle with the new UK government, and that's led traders to question the economic credibility of the country.

Watling joined me for a special sit-down conversation for a discussion on the state of the UK, his current global market strategy, and what he feels are the next big risks on the horizon. We also dig deep into the changes he's made to Longview's model portfolios - and there are many to get through.

Watling's top conviction calls

  • A global recession is coming, most likely in 2023
  • The Federal Reserve will engineer the global recession by making a second big mistake
  • Underweight risk assets, including equities
  • Relative bias in favour of the US, Australia
  • Gold and US Treasuries are some of his new positions but he's turned bearish on crude oil

Note: The following interview was recorded on Tuesday, October 11th, 2022. The video you are watching is a second edit, to fix an out of sync audio error which was spotted after publication. 


The UK's crisis: A view from the ground

If Watling's story is anything to go by, the UK is doing it very tough right now. Even his 20-year-old sons now cannot afford to get a Friday night drink - a situation he describes as "shocking". It's all symptomatic of the global inflation surge and falling confidence among consumers and businesses. 

What is unique, however, to the UK story is the mini-Budget handed down by new Prime Minister Liz Truss and Chancellor Kwasi Karteng. The suite of tax cuts was widely viewed by analysts and pundits as irresponsible - a view that Watling partially shares.

"I think it's some good ideas but the wrong time," Watling told Lee. "You don't do an unfunded fiscal package that means you need to issue more debt at a time when everyone is selling debt," Watling added.

As they say, it's all about the timing.

Soul searching

Last month, Reserve Bank Governor Philip Lowe told a crowd of economists and media that global monetary authorities were in a "soul-searching" moment. The rise in inflation - and its stubbornness - has well and truly caught them out. The Bank of England is no different, although its inflation problem is far worse than it is in Australia.

But Watling has a much less sanguine view. He argues central banks (and in particular, the Federal Reserve) is about to make an even bigger mistake than the one on inflation.

"I lay part of the blame at the door of how central banks are run today," Watling said. "I think central banks will hike until something meaningful breaks. The first chink of that was the UK pension system."

Rapidly changing views for a rapidly changing world

I first met Watling over Zoom just a few months ago. Back then, he told me that a global recession was not his base case:

Asset Allocation
Chris Watling: Recession is not a "slam dunk" but bear market may endure

Fast forward to today and his models have alarm bells ringing all over the place. That means equities are in a bear market and that bear market may still have more to run.

"It's evolved," Watling said. "If I look at the range of indicators now, it's a lot of ticks and pretty serious ticks. The recession risk is very significant for 2023 in the US," Watling said. He went on to add that the risk is well above 50%, and it could be as high as 70-80%. 

Is a bounce coming for equity markets?

Longview Economics runs two model (paper) portfolios - one looking at short-term market machinations and the other taking a medium-term perspective. In both cases, Watling told Lee they were underweight risk assets including global equities until very recently. Two weeks ago, that changed when the short-term portfolio changed its equities from underweight to overweight, on expectations of another bear market rally.

"Bear markets aren't straight lines - and it seems to us the bearish narrative is just too strong," Watling said. "People are too fearful. A bounce is due."

For equity investors, there are two looming events on the horizon. The gorilla in the room is US quarterly earnings season - which started this week with the Big Banks. Watling argues we are still building toward a recession, but that the earnings shoe won't drop just yet.

"There are clearly things to worry about but I don't think the big collapse in earnings is [here] yet," Watling said.

Australia is a "buy the dip" opportunity - kind of

The other big risk for Australian investors to consider on the earnings front is mining quarterly reporting season. Watling is "in two minds" about Australia but does not doubt that the ASX is home to a - pardon the pun - gold mine of ideas.

"From the stock market's point of view, I think it's where you should favour," Watling said. "Underweight everything but favour places like Australia and Canada in particular on a structural basis."

"On dips, I would certainly buy the resources stocks - BHP - stocks like that," Watling said. He also adds gold and natural gas as other top commodities worth watching. On the Big Four + Macquarie Group, Watling said he actually prefers US banks given their lesser dependence on the housing market. 

Other opportunities worth exploring: gold and bonds

Some of Watling's other ideas involve traditional investment hedges - gold and US Treasuries. He argues that medium-term investors can start to think about the value these assets are presenting in the face of a short-term cyclone. On bonds, Watling argues that bonds are looking attractive for multiple reasons - as long as you believe one thing.

"I think so, if you believe inflation's going to dissipate, why wouldn't you want a 30-year yield at 3.5 to 4%?" Watling said. He added that a simple read of Elliott Wave Analysis will demonstrate that bonds have had a "blow off top" - a good indicator the bulk of the sell-off may have finished.

Gold is also presenting opportunities right now that it didn't for the past two years. The reason for that is simply because it's been uninteresting.

"I like the fact no one owns it, everyone's bearish. I like the fact it's been resilient when it should have gone down tons," Watling said. "It's held in and it's at a key level."

His contrarian call: crude oil

The reason for this thesis can be summed up in just one line.

"I don't think the oil market has priced in a recession," Watling said.

In reality, Watling argues that OPEC+ has not made the serious production cuts it normally would during a recession. The other part of this call is purely instinctive. In April and May, when Brent Crude's continuous contract prices topped out at nearly US$125/bbl, Watling recalled how many analysts were predicting a US$200/bbl price on oil. 

This, of course, never materialised but it was an example of how an uncomfortable call may sometimes be the right one. And uncomfortable calls are what every investor needs to face at some point.

Extra reading: If you want to read more about his bearish base case for oil, you can click this wire which Watling wrote for the website recently:

Is ‘something’ breaking? Why we're long bonds, bearish oil
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Hans Lee
Content Editor
Livewire Markets

Hans is part of Livewire's content team. He is the moderator and creator of Signal or Noise. He also writes the LW-MI Morning Wrap on Tuesdays and Thursdays.

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