While much ado is made of the science that goes into fund manager research, real assessment puts comparable weight on the art as well according to investment leaders.
While financials and materials dominated trades leading into 2024, the popularity of other sectors like healthcare and information technology followed generational, and even demographic, lines.
Rising US inflation sparks recession fears: BCA research
With annual core US inflation coming in at 6.3 per cent, up from 5.9 per cent for the previous month, the rate rising cycle is likely far from over. The US Federal Reserve has already signalled its intention to raise rates again as it tries to curb soaring prices. The aggressive stance is raising recession fears.
With every US Federal Reserve interest rate rise, added pressure is placed on American families as they pay more for petrol and energy as well as food and general groceries. After it raised its benchmark interest rates by 75bps, the Fed is targeting an interest rate range at around 3 per cent to 3.25 per cent. The annual inflation rate, including energy, is now sitting at 8.26 per cent.
“The odds of a global recession have risen,” BCA Research noted in its recent strategy report. “We now assign 40 per cent odds to a US recession over the next 12 months. However, if a recession does occur, it is likely to be a very mild one, reflecting strong underlying economic fundamentals.”
BCA Research is expecting the US Federal Reserve to raise rates to 3.8 per cent in 2023.
While the odds of a recession remain high, there are hopes that weaker than expected economic data may cause central banks across the world to take a more dovish stance.
“Global earnings estimates will come down, but not as rapidly as most investors expect. Favour non-US stock markets. Chinese stocks will continue to outperform.”
Following this month’s 75bps rate rise, the yield on the benchmark U.S. 10-year Treasury note rose as well. Despite this, recent economic data has been soft, and it has caused the US Federal Reserve to pivot to a less hawkish policy stance.
“While global bond yields still have scope to rise over the long term, they will dip over the next 12 months as inflation declines,” BCA research stated. “Corporate debt will outperform high-quality government bonds.”
Rising US Fed interest rate rises are also having a significant weakening effect on the rest of the global economy.
“The US dollar, which is now almost as overvalued as it was 1985, is set to weaken. The yen will be the surprise winner during the remainder of the year,” the research stated.
On the commodities side, precious metals have weakened, having come of their March 2022 highs.
The BCA strategy note acknowledged that tight supply “will support commodity prices in the near term, but the longer-term outlook is bleak”.
With inflation well above target, it’s fair to say the US Federal Reserve will continue raising rates. Any rate rises will be passed down to borrowers and credit card holders who in turn will spend less. When spending falls so does demand, and eventually so will the price of everyday goods and inflation.
“With global equities down 24 per cent in real terms from their peak earlier this year, a lot of bad news has already been priced in. A modest overweight on stocks, a neutral position on bonds, and an underweight on cash is appropriate,”
