Surviving a recession

For many charity chief executives this will be their first recession, and even for old hands, it looks like this one will be quite different from last time around. Economists can be spotted leafing through the yellowing pages of old history books to come up with ideas about what might happen next.

Unlike economists, chief executives have to decide how to manage their risks and grab their opportunities, and need to know how this downturn may unfold. What we do know is that deteriorating reports confirm that the outlook remains pretty grim, and this looks likely to be the first synchronised recession in more than fifty years. Indeed, the news flow suggests that the downturn will last at least until mid-2009, and inflation is likely to turn negative in the UK next year. Anaemic recovery does then look likely and whilst some are drawing comparisons with Japan's 'lost decade' of the 1990s or even the Great Depression of the 1930s, there are clear signs that the policy agenda for central banks and governments should avert a more major downturn.

Nevertheless, the vicious cycle of de-gearing will continue to work through, resulting in more expensive and less available credit. The market for credit slowly became more difficult since US subprime problems appeared in February 2007, but the systemic shock from the sudden demise of Lehman Brothers in mid-September 2008 created severe dislocations in financial markets and sharp declines in asset values, taking lender caution to new record levels.

There are two immediate consequences that may affect charities. First, charities that borrow money should review the terms of their loans, and if necessary shop around because the pricing and availability of loan finance is presently very variable. Secondly, these conditions mean that there is a much higher risk that those that they deal with may go bust, and as a result charities should review the safety of their assets and sources of income. In practice this means shepherding their cash reserves, revisiting any joint ventures, and considering how to safe-guard relationships with landlords or tenants. Don't forget that these conditions also present an opportunity to renegotiate contracts with commercial organisations on very advantageous terms.

Turning to investments, these conditions mean that charities should review their asset allocation and consider whether they should make any changes. Times like these present opportunities as well as problems, and a sensitive re-organisation of assets may be appropriate. Charities with long term funds who have adopted a total return strategy with a distribution policy may find that they risk becoming forced sellers of depressed assets to maintain cash flow, undermining the scope for recovery in due course. These charities may want to consider re-positioning their assets to achieve a higher income yield, as this provides greater tolerance of fluctuations in capital value, which look set to continue for some time. You should expect your investment manager to provide you with helpful support in all of these areas without extra charge. If not, you know where to find us!

In a broader context, charities should assume that all sources of income will be under pressure, whilst there are likely to be more demands on their resources. This means that budgets and business plans should be reviewed. Charities should consider how they will respond to a further deterioration in conditions, as it is so much better to pre-determine how they will act, rather than being forced to review options in the face of adversity, when panic decisions may result.

This recession will be a very effective stress test of charities strategy and structure. Well managed organisations will emerge from the dust in a better relative position than before, and we predict that in years to come their chief executives will recall the recession of 2008/09 with just a hint of nostalgia.

Michael Quicke
Chief Executive
CCLA & James Bevan,
Chief Investment officer
CCLA
http://www.ccla.co.uk/

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