US recession ‘still likely’

Investors should prepare themselves for a lasting environment of higher inflation and interest rates, according to American Century chief investment officer, Victor Zhang.

In an analysis released this week, Zhang said that investors will need a new mindset this year, adjusting for an environment where higher inflation and interest rates are the norm and in which a US recession is still likely.

“Today, credit is tight, interest rates are high, and the consequences of slower economic growth and capital allocation mistakes may be more severe,” he said.  “Investors should ask what adjustments they must make to their portfolios if such conditions hold for the long term, as is likely.”

“First, investors must come to grips with the idea that the risk-taking that worked so well for many of us after the GFC may not be as successful in this environment. Second, they must embrace broader portfolio diversification to deal with greater uncertainty,” Zhang said.

As well, he said that despite the US Federal Reserve’s dovish pivot, a recession is still a likely economic outcome in 2024.

“Though many observers are now calling for an economic soft landing, we think high interest rates and tight credit conditions will continue to wear down consumers and businesses, slowing economic growth and weakening the job market.

“We expect the US economy to slow further in the coming year. Higher-risk assets could experience greater volatility in that scenario, so investors may need to build more buffers into their portfolios.”