22.11.2018 Tommi Kemppainen

How do you plan to avoid losses in a recession?

Why is HCP Black Portfolio Strategy Defensive? 
2018: the First Year of Falling Markets

Making an economic forecast is difficult. How long until we face the next recession, no one knows. One thing is certain, though. Companies, governments, and consumers have more debt than ever before. To make sure everyone has a maximum amount of debt, we already once had interest rates down at zero.

On the video above, the HCP Black Portfolio Manager Tommi Kemppainen discusses why it is important to be defensive in the current market situation. The video is subtitled in English.

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The GDP Growth is Based on Debt

In normal economic conditions, the GDP grows if the working population grows or the productivity increases. In Western countries, however, the population is aging and the dependency ratio weakens fast. The productivity, on the other hand, is something that is hard to increase rapidly.

The GDP growth that we have experienced during the last decades is largely based on debt. Consumers, companies, and governments have been borrowing money and we have achieved GDP growth with credit spending.

Why Should One Worry About a Recession Now?

Many may think that there was a lot of debt already back in 2007. As the stock exchanges around the world survived the crash that began in 2007, why wouldn’t we be able to turn on the plus side now, in 2018? Has something changed? A high amount of debt and higher-than-average stock valuations continue to be true in the world economy in 2018.

The difference compared to 2007 is that we now lack the possibility to cut interest rates in order to revive the economy. That remedy was used up by the Fed and the European Central Bank already in the 2007–2009 stock market crash when they dropped interest rates to zero.

A Historical Reminder

”Sooner or later a crash is coming and it may be terrific” – Roger Babson

An American entrepreneur Roger Babson (1875–1967)  foresaw the Great Depression that started on Wall Street in 1929. Babson was first two years and then one year too early. Then he was right on time. Being defensive two years before Black Friday, Babson missed a 100% rise, but after the market had fallen back to the levels of two years before, it still fell another 75%. Babson also missed this fall.

Very often, there is news about how dangerous it is if you miss the top ten days in the market. But a lesser-known fact is that, if you manage to stay out of the market the worst ten days in this period, you might come out as a winner from a recession.

Invest Defensively with HCP Black

The multi-strategy, multi-style fund HCP Black aims for the best risk-adjusted return through active diversification. HCP Black fund is already positioned defensively. Even so defensively that if the market now fell dramatically, it’s likely that the value of HCP Black would rise.

The majority of the portfolio is made up of investments that should be as different from each other as possible. That is why no single shock should affect all investments at the same time. Therefore, gaining returns should be possible also during a recession.

HCP Black Allocation

HCP Black Allocation

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This text is edited by Miika Koskela based on Tommi Kemppainen’s collected articles from 2015–2018. Read all the articles on HCP Black Blog.

Why is HCP Black Portfolio Strategy Defensive? 
2018: the First Year of Falling Markets

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