How we plan to generate returns in the next global recession

With the correct set of risk management practices and quantitative investment analysis, returns north of 50% can be generated from recessionary global events. For a diversified portfolio of stocks or property, this offers complementary returns which permit wealth accumulation no matter the economic climate of the day.

Such a strategy does, however, require some understanding of where we currently are in the business cycle.

The late-stage bull market

Firstly, let’s review what some of the world’s most astute investors have been saying about the current global economic outlook.

Jeffery Gundlach is one of the world’s best investors. He’s the founder of DoubleLine Capital LP (which has north of $120b of FUM) and was one of the few who saw the GFC coming. Gundlach recently flagged that he believes there’s a 30% chance of a recession in the next 6 months, 50% within the next year and a ‘very high’ chance within 2 years.

Gary Shilling, President of A.Gary Shilling & Co, correctly called the Global Financial Crisis as well as the long stagnation thereafter. Shilling recently put the probability of a recession beginning in 2019 at 66%.

Ray Dalio (who I’m sure to Livewire readers needs no introduction) in a recent interview with Fox Business noted, "it's important to then say where … we are relatively late in the shorter debt cycle. We can tell by operating rates and unemployment rates and so on fairly well along in there and we are very late in the long-term debt cycle ...

So what is the historical record when we get to this converging end of the short-term debt cycle in the long-term debt cycle. I mean are we in for another debt crisis?"

Our thoughts

To investors of Vega Capital, this is not new news, in fact, we’ve been talking about these trends in every single monthly report since January. If it is true that we’re at a very late stage in the economic cycle and then the next stage must be for a bust.

But let’s not run to our fallout shelters just yet. The bull market could end in a few months’ time or perhaps next year, so careful execution of a short is paramount. We don’t want to be right on the view, but wrong on the trade because an early short is far more costly than a late long. This is why we remain cautiously long market exposure and will retain this delicate position until the timing is indubitably right.

As such our algorithms are closely observing debt markets, employment numbers and momentum to ensure we pull the short trigger at the right time.

To generate returns of a magnitude such as 50% or more when the recession does arrive, careful investment selection is required. We utilise a set of quantitative algorithms which can review thousands of investments in minutes to find positions with a high payoff/tolerable risk profile and create a suitably optimised portfolio.

The below example shows the hypothetical value of a $1 million dollar portfolio (currency hedged) utilising this investment selection algorithm over the GFC. The blue line is the model portfolio whereas the red line is a portfolio comprised entirely of the S&P500 index with dividends reinvested. 

As shown, it’s clear that whilst a recession does present risks for investors, it can also provide ample opportunity for growth.


Founder and Portfolio Manager
Vega Capital

Scott has seven years of experience in investment and risk management, was previously an analyst at Montgomery Investment Management, and holds a degree Economics from the UWA as well as a Master’s degree in Financial Mathematics from UNSW.

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