In my September letter, I cover:

• The investment lesson hidden in a century of economic data

Economic downturns have not disappeared, but they are far less common than they once were. Understanding this shift can help investors put market risks into perspective.

• Why preparing for recession matters more than predicting it

Successful investing is not about forecasting every economic downturn, but about building portfolios that can navigate a range of possible outcomes.

• Our highest-conviction investment views

We continue to favour equities over bonds, particularly emerging market equities, while continuing to recommend bonds, gold and other diversifying assets as appropriate for our customers.

The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. Past performance should not be taken as a guide to future performance. You should continue to hold cash for your short-term needs. This article should not be taken as advice.

Following the hottest summer on record, more than 10 million children in the UK are heading back to their classrooms.

My official schoolboy days are a little way behind me, but as your Chief Investment Officer, I’m still constantly doing my homework when it comes to financial markets.

However, as with the trickiest of exams, in my experience investing is not all about how much you know. Indeed, in my view, one of the great misconceptions about investing is that success comes from knowing more than everyone else.

In reality, understanding financial markets, and the economic environment in which they operate, is an undertaking that often resembles an open-book exam. Vast sums of information are available: the challenge is in deciding which details matter most, what you should do about this, and when.

Investors regularly face testing situations, with asset prices reacting (at least in the short term) to challenges ranging from national and international politics to inflation surprises and industry-specific shocks. Most of these tests are manageable, with markets historically able to absorb short-term political and economic turbulence.

But there is one test that investors cannot afford to fail: economic recession. Financial markets cannot easily ignore a meaningful, sustained hit to economic growth. When economic growth contracts, two things happen simultaneously. One, corporate earnings naturally come under pressure as growth and economic activity stall. Two, the multiples investors are willing to pay for those profits also fall as confidence fades and sentiment darkens.

Therefore, recessions represent the biggest challenge investors can face. I believe that getting our view on this right is the single most important thing we could do for our customers.

Recessions are obvious with hindsight, but rarely so in real time. They are often born amid periods of high confidence and apparently healthy economic conditions, but this doesn’t mean that every time the economy is growing, an economic recession is imminent. Indeed, it is often joked that economists have predicted 10 of the last three recessions!

While the past is an unreliable guide to future outcomes, economic history is still the closest thing investors have to a set of past exam papers. Over the long course of history, economies have grown, productivity has advanced, and businesses have invested, adapted and innovated. Progress has rarely followed a straight path, but the overall direction has been one of long-term expansion.

Recession is always a setback – sometimes a debilitating one, such as in 1929 or 2008. The path back to growth can vary in speed and shape, depending heavily on the root cause of the downturn. Nonetheless, modern market economies have always historically recovered from recessions over the long term.

What’s more, there is strong evidence to suggest that the frequency with which modern economies face recessions is changing… 

Thanks to a long history of economic data, there is evidence to suggest that recessions are far less common today than in the past.

For a worked example, let's turn to a familiar case study: the US economy.

The US economy spent roughly half the first four decades of the 20th century in recession. It then spent one-fifth of the next 60 years in recession, before plummeting to one-tenth in the first two decades of the 21^st century. I’d argue that this is one of the most important but underappreciated economic developments of the past century.

Source: The National Bureau of Economic Research (NBER), Coutts. Data accurate as of 25/08/2026. Recessions defined by NBER criteria.

Screen reader text: Bar chart showing percentage of calendar months the US spent in recession by 20-year period. This fell from around 45% in 1900–1919 and 1920–1939 to 17% in 1940–1959, then declined further to 12% in 2000–2019.

I’m sure many of our readers will wonder if this is an exclusively US phenomenon. It’s not. Very long-run UK economic data also suggests this change is evident across more than half a century: 49% of the months in 1960-1979 were spent in recession, while from 1980-1999 this figure was 44%. Even in the 2000s, which included the very height of the 2008 global financial crisis, only 20% of the months in 2000-2019 were spent in recession in the UK.

Recessions haven’t become less frequent by accident: a combination of factors has played a part.

First, while not all economic shocks can be managed away, economic growth has become less volatile over time, reducing the frequency of sharp movements up and down. This is partly a result of the changes in the composition of developed economies. As the chart below shows, over time, the relative contributions of the agriculture, manufacturing and service sectors to US GDP have shifted dramatically. 

Source: Our World In Data, Coutts. Data accurate as of 26/05/2017.

Screen reader text: Stacked area chart showing the changing composition of US GDP from 1900 to 2010. Services rose from 32% to 84%, while agriculture fell from 40% to 1%. Manufacturing peaked at 34% in 1950 before declining to 15%.

One lesson that emerges clearly from this data is that developed economies aren’t taking the same economics test they were a century ago.

This is because the service sector is generally less volatile than agricultural and manufacturing industries. Set against agriculture, the service sector is comparatively shielded from unpredictable weather, biological cycles, and extreme physical commodity price swings. Set against manufacturing, demand for service sector output (such as healthcare, education, and utilities) tends to remain relatively steady during economic downturns, and services cannot be easily overproduced or find themselves piled up in warehouses, unlike physical inventory. I even consider haircuts essential, though those of you who have met me will testify to my follicular challenges.

Second, learning from a long history of economic crises has arguably produced better institutions, better policy frameworks and techniques to reduce the severity and frequency of recessions. This takes forms ranging from clear central bank mandates and communication to prudential regulation and oversight.

Andrew Ross Sorkin’s 1929: Inside the Greatest Crash in Wall Street History – and How It Shattered a Nation received widespread critical acclaim following its release last year. I am delighted to hold a signed copy. One of the most striking themes of the book is how differently economies were managed 100 years ago: reading it today highlights how much economic management has evolved, and how many of these improvements are visible in the chart.

For example, in 1933, in response to the Great Depression, federal insurance on bank deposits was introduced. This made ‘runs on the bank’ far less frequent in later crises, such as during the global financial crisis – despite poor bank balance sheets.

Importantly, we’re not suggesting that recessions have been managed into extinction. But, overall, the data clearly shows that they have become much less frequent.

Our open-book exam on economic understanding is not about predicting the next recession with perfect accuracy. Instead, it’s about managing the risks and seeking the opportunities across a range of possible outcomes.

Markets evolve alongside economies – albeit with long and variable lags – and today’s less volatile developed economies have generally produced less volatile earnings streams. For long-term investors in particular, this is welcome news.

Valuations, which estimate the fair value of financial assets, remain important. However, as we’ve highlighted above, the underlying economic regime has changed, making us cautious about any assumptions that equity valuations will return completely to their long-run averages (‘mean reversion’). Today's leading companies operate in a less volatile economic environment, with less frequent recessions. Given the relationship between recessions and earnings growth, this has led to more resilient earnings streams than many of the businesses that dominated previous decades. If the quality of the underlying asset improves, why should we expect the valuation multiple to remain unchanged?

Recessions remain a key risk to multi-asset investors, but if they are less frequent than before, this should give long-term investors confidence as well as perspective.

Importantly, risk – including but not limited to economic risk – cannot be eliminated. We wouldn’t want it to be: we need risk in order to create the potential for reward.

We aim to build portfolios that can withstand the ups and downs of economies and markets, while continuing to participate in growth and expansion.

I’ve used this letter to outline our thoughts on (and efforts to manage the impact of) economic risks to portfolios. But we know that another topic on our customers’ minds is turbulence in bond markets.

For much of this year, volatility in global government bonds has been elevated. At times, UK government bond markets have been volatile in an apparent response to political developments, but higher bond yields have really been a global story too. As I write, UK 10-year government bond yields are slightly higher (35 basis points) than their US counterparts. This has not been uncommon in recent years.

Turbulence in global bond markets has been driven by perennial questions of government debt and deficit levels, as well as a recent push higher in inflation expectations, in large part due to the knock-on effects of the US-Iran conflict. August’s announcement that the US Treasury would buy back longer-dated US government bonds (by issuing shorter-dated bonds) was an effort to limit recent rises in yields for the former.

The decision demonstrated that the US government has a pain threshold when it comes to government bond markets, which in itself should limit some of the recent volatility in bond yields. However, some pressure will likely remain, given strong economic growth, above-target inflation, and elevated deficits.

It’s also worth noting that any sustained efforts to suppress US government bond yields are likely to put downward pressure on the US dollar (we continue to prefer sterling versus the dollar) and should support gold (which we see as a valuable diversifier).

We prefer equities over bonds, as I’ll touch upon again in our ‘core investment views’ section below. However, we think government bonds offer the potential for attractive returns above inflation. As the chart below shows, based on the market’s expectation of US 10-year inflation averaging around 2.3%, US government bond yields today offer investors an additional 2.4%, a so-called “real yield”.

Source: Federal Reserve, Macrobond, Coutts. Data accurate as of 14/08/2026.

Screen reader text: Area and line chart showing US government bond yields from 2000 to 2025. Nominal and real yields fell broadly until 2020, then rose sharply. By 2025, nominal yields were about 4.1%, inflation expectations 2.2% and real yields 1.9%.

The primary risk investors are exposed to, in exchange for extending credit to the US government, is the risk that inflation is higher than anticipated over the next 10 years. But in our view, today’s attractive starting valuations – with real yields above 2% – provide some compensation for that risk. Based on UK inflation expectations, real yields in the UK are slightly lower, but also attractive, at roughly 1.4%.

In my June letter to you, I discussed bonds in depth. I noted that the best indicator of future returns for a regularly rebalanced portfolio of government bonds comes from their ‘starting yields’: the annualised rate of return bond investors can expect to receive if they buy a bond at its market price and hold it until maturity.

It bears repeating. The chart below shows the returns, since 1871, of a portfolio of US government bonds that rebalances to achieve a consistent 10-year maturity, as well as the bond yield at the start of the 10-year period. As you can see from the close relationship between the two, over the long run, starting yields are the key indicator of long-term government bond returns. 

Source: Shiller, Coutts. Data accurate as at 25/08/2026.

Screen reader text: Scatter chart showing strong positive relationship between starting yields and total returns for a 10-year government bond portfolio. Dots cluster around an upward-sloping trend line, indicating higher starting yields have generally led to higher returns.

This relationship has persisted since 1871, extending through World War I, World War II, German unification, German reunification, US debt to GDP of 10%, and US debt to GDP of 120%. In our view, this’ll continue, despite any near-term challenges.

So, while the reduced reliability of government bonds as diversifiers means investors must reconsider exactly what risks government bonds will reliably protect against, today’s attractive long-term nominal yields of above 4% still point to attractive long-term returns.

Our investment process is grounded in data and evidence, with our positioning informed by a range of factors, including policy developments, inflation trends and the outlook for economic growth.

Below, we recap some of our highest-conviction investment views.

We still prefer equities over bonds, but with a more measured allocation

We have maintained an overweight position in equities, to varying degrees, since late 2023. In June, we maintained our overweight equities stance, but reduced the magnitude of this position versus bonds, which we continue to value for their income potential and ability to provide support during periods of weaker economic growth.

This shift reflected signals from central banks and the potential implications for markets. We continually monitor for any further tightening in financial conditions or signs of changing capital expenditure plans in the technology sector, both of which could affect the economic growth outlook. For now, we continue to expect growth to remain resilient, supported by artificial intelligence (AI)-related investment and healthy corporate earnings, which we believe should be supportive for equities.

We maintain a broad approach to portfolio diversification

Diversification remains a core element of our investment approach. While government bonds continue to play an important role alongside equities, we believe they may be a less dependable diversifier than they have been historically in an environment of persistently above-target inflation and higher interest rates.

As a result, we continue to draw on a broader range of diversifying assets, including different currencies, gold and liquid alternatives where appropriate for customer portfolios. By maintaining diversification across a range of asset classes, we seek to build portfolio resilience across different economic environments. This flexible approach helps us to manage uncertainty while positioning portfolios to navigate both opportunities and challenges as they emerge.

Emerging market equities remain our preferred route to the AI theme

Emerging market (EM) equities have benefited from strong investor interest in AI throughout 2026. The region plays a central role in the global semiconductor supply chain, supporting our decision to increase exposure to EM equities earlier this year.

Market performance has been more volatile in recent weeks as investors reassess the valuations of AI-related businesses. Despite this, we continue to view EM equities as an attractive and diversified way to access the improving earnings prospects and long-term growth opportunities associated with AI, often at more compelling valuations than developed markets.

Returning to where my letter began, the decline in recession frequency is one of the most important yet underappreciated economic lessons of the last century. I hope my letter does not act as a jinx! But we believe that understanding structural improvements in the economy is just as important as understanding the next economic cycle.

While we’re not expecting another recession imminently, some form of economic downturn will inevitably occur at some point. In our view, the most successful investors are not those who can predict the future with perfect accuracy. They are often those who remain disciplined enough to keep learning, adapting and applying the lessons of history. This is partly why we have held a pro-risk stance for three years, even as many market participants took risk off the table, concerned about a recession that did not materialise in this period.

Nonetheless, our focus is on preparation, not prediction. In service to our customers, this means building discipline and diversification into our approach, and following a repeatable, robust asset allocation process, which allows for sensible risk-taking while always being prepared for the cycle to turn, which it inevitably will.

Yours sincerely,

Fahad Kamal 

Chief Investment Officer