In recent weeks, many fund managers have already been talking about the dreaded word: Recession. In other words, a generalised reduction or loss of economic activity in a specific region or country. The European Central Bank, at its last meeting on the 9th of June, acknowledged that we are facing difficult months ahead with quarters of weak growth and the possible risk of a technical recession.
Corrections and bear markets are part of equity investing, but their magnitude often depends on whether they are accompanied by an economic downturn.
“While we do not currently foresee a recession in the United States, the risks are tilted towards one. Recessions do not necessarily follow a bear market, although the odds are not favourable if you look at history. Since 1900, the US economy has only managed to avoid a recession 30% of the time when a bear market has occurred,” notes Tina Fong, a strategist at Schroders.
“The global economy is slowing,” warn Muzinich & Co. “This week’s advance PMIs on the US and Eurozone economies make this clear. If the catalyst for the collapse in confidence has been the hawkish stance of central banks, and the tightening of policy in place, it is likely that current monetary policy will not be tight enough for inflationary targets to be met,” they say. To reinforce their hypothesis, they base themselves on “JP Morgan’s recession model in which the probability of a recession in the US has increased to 36%. “Consumer confidence is the main component of the model, which is also Muzinich’s preferred measure of investor sentiment”.
For Ostrum AM CIO Ibrahima Kobar, “a recession in both the US and Europe now seems very likely, as the economies have difficulty absorbing so many simultaneous negative shocks. A market crash is also a possibility we cannot rule out. Second, in this case, central banks would abandon their inflation monomania and finally take growth into account in their decisions. In this scenario, the pace of tightening would slow down, with market expectations likely to be very high. This would lead to an easing of rates by the end of the year. The question is where the tipping point is, when central banks will stop.
The experts at Evli Fund Management indicate that a recession in the US has a 50% chance of occurring in the next 12 months, and globally it is more likely and in a shorter time frame. “Economists’ and consensus forecasts of the likelihood of recession in the US in the next 12 months have risen to a 50% probability. On the other hand, a global survey of investors considered the likelihood of a recession to be even higher, with almost a fifth of respondents anticipating that it would start as early as this year,” the bank notes.
In the view of Valtteri Ahti, Chief Strategist at Evli Fund Management, central banks are raising interest rates to curb inflationary pressure, which increases the risk of recession. “Given the significant correction in the stock market, the market is already pricing in a mild recession. If corporate earnings remain firm and recession does not arrive, the market will correct its low valuation and start to rise again. The stock market turnaround could manifest itself once the markets detect that inflationary pressure in the US starts to ease,” the Nordic fund manager says.
The likelihood of a global recession towards the end of this year or early next year has increased. However, “each region has different risks,” argues Keith Wade, chief economist at Schroders. “While everyone has a measure of inflation risk – particularly the US and Europe – China, for example, has a big problem in the form of zero Covid policy. Investors have started to think seriously about the possibility of a recession. That’s why we’ve seen equities and parts of the credit markets weaken,” Wade concludes.