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A recession is all but inevitable for the U.S. and investors should be playing defense in that kind of environment, according to the head of the TCW Group.
“We are going to have a recession, because that’s the way the world works,” Katie Koch, CEO of the firm with $210 billion under management, said Thursday at CNBC’s “Delivering Alpha” conference. “We haven’t had a real one for over a decade and a half.”
While Wall Street has been bracing for a contraction for much of the past two years, the U.S. economy has stayed afloat due largely to a resilient consumer flush with cash and a labor market that has remained powerful.
However, Koch said the Federal Reserve’s interest rate hikes targeted at slowing the economy and bringing down inflation will start to bite. Higher rates have long been thought to work with lag effects, the timing of which is uncertain and dependent on a variety of factors.
“I do think it pays to be patient and wait to see higher rates work their way through the system,” Koch said. “We haven’t seen the pain of higher rates, but it’s coming.”
From an investment standpoint, Koch recommends a mostly conservative array of choices that includes cash. She also spoke favorable of agency debt, mortgage-backed securities and Treasurys, as well as companies that have longer-duration capital.
But Koch worries about consumers as well as companies that have used the “extend and pretend strategy” to put off paying down loans.
“That is the bedrock of the US economy, obviously the consumer and small and medium companies, and I think they are going to struggle to finance themselves in this environment and that further leads us to a relatively bearish outlook,” she said.
Don’t miss the biggest investment ideas in the business. Learn more about CNBC’s Delivering Alpha investor summit here.
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