Felicia Tan
Recession fears are on the rise this year, according to the results of a survey conducted by Natixis Investment Managers.
The survey sought responses from 34 market strategists, portfolio managers, research analysts and economists at Natixis Investment Managers, including 27 representatives from 15 of Natixis’ affiliated investment managers.
Of the 34 strategists, 24% of them believe that a recession is “inevitable” in the second half of 2022, while 64% believe that it is a “distinct possibility”.
In addition, the survey shows that 90% — or nine in 10 strategists – believe that central banks’ policies will be the biggest market driver over the next six months.
Recession was also seen as the second highest market risk for the second half of this year, with 64% of strategies ranking it as a top risk.
“Policy makers have many tools at their disposal to address inflation and given the challenge of achieving the right timing for policy implementation, the margin for error is slim,” says Natixis in a statement released on July 20.
“For many the question remains as to whether these efforts will thwart inflation, trigger a recession that could last two to three quarters, or result in stagflation that lasts for years. With all the possible outcomes, no wonder more than half (55%) of those surveyed also cite a central bank error as a key risk,” it adds.
Mabrouk Chetouane, head of global market strategy at Natixis Investment Managers Solutions, says recession is casting a “long shadow” over the markets.
“But in some ways the only way out of this inflationary environment is for central banks to trigger this recession. Then we’ll come out on the other side of the inflationary shock, and the markets could then rebound,” he adds.
Inflation seen as top market risk
Inflation was seen as the top market risk with 70% of strategists ranking inflation as the biggest market risk for the second half of this year.
Even if inflation has tapered slightly from its highs, 36% of respondents have set the level of market risk due to inflation as a 10 out of 10.
Central banks also play a key role in inflation with 52% of strategists citing central banks’ policy decisions as a “key inflation driver”.
Another 46% also believe that the supply chain issues that helped drive inflation early in the pandemic will continue to do so through year-end.
That said, less than 25% — or less than one in four — strategists believe inflation will remain persistently high.
Geopolitics, war and oil seen as key risk considerations
Beyond inflation and the possibility of a global recession, the strategists see the potential for world events such as the Russo-Ukraine war as key risk considerations.
Around 65% of strategists surveyed have placed geopolitics as a top risk and as an offshoot, nearly half – or 47% — of those surveyed see energy prices as a significant risk for markets in the 2H2022.
Nearly half of the strategists – or 49% — say they anticipate the West Texas Intermediate crude to end 2022 somewhere in the range of US$100 ($139.32) to US$125.
And while there is still 15% who believe prices will rise past the US$125 mark, the larger number (33%) forecast that prices will drop between US$85 to US$100.
In addition to the survey, the strategists polled believe that value stocks will continue to shine.
Value stocks have outperformed out of the pandemic-driven disruptions. Low rates and low volatility had provided a rising tide in which most stocks excelled over the past decade. As a result, it was harder to find underpriced stocks, says Natixis.
Around 58% believe that the run will be extended for at least a few more months while 24% think value will be on top for a few more years. Another 19% think the value trend has already run its course.
“The opportunity set is shifting rapidly. The new environment is creating idiosyncratic opportunities that are more attractive investments than the broader indices. These opportunities can be found across multiple sectors,” says Chris Wallis, CEO, CIO, and senior portfolio manager, Vaughan Nelson Investment Management.
In bond markets, yields are now at 2.975% as at June 30, in which 73% of strategists believe there will be more increases from central banks.
Another 36% believe US Treasuries will finish the year somewhere between 3% and 3.5%. The same number anticipates even more hikes and forecast rates reaching above 3.5% by year’s end.
Summing up the report, strategists see a world that has changed dramatically in the past six months.
“After a decade in which the easy money provided by quantitative easing, low rates, and low inflation propelled markets to positive gains in seven out of ten years, the world is moving on,” says Natixis.
Katy Kaminski, chief research strategist and portfolio manager at AlphaSimplex Group LLC, one of the affiliated investment managers said that the ten years of “over-reliance” on easy money, which “led to significant outperformance for growth equities” is “over for the foreseeable future”.
“The biggest market driver at the end of 2022 will be central banks and bringing down inflation to lower the longer-term cost of capital,” she adds.