Nearly a quarter of respondents believe a recession in the next six months is inevitable. Two-thirds of respondents consider that this is currently only a possibility.
- The results of the Natixis Center for Investor Insight’s half-yearly survey of 34 experts show that almost a quarter (24%) of them believe that a recession over the next six months is inevitable. 64% of respondents consider that this is only a possibility for the moment.
- Nine out of ten experts say central bank policy will be the main driver of the market over the next six months.
- They see energy prices (76%), food prices (64%) and wage increases (61%) as the three main drivers of inflation.
- Almost six in ten (58%) say value will continue to outpace growth for at least a few more months, while almost a quarter (24%) think value will stay ahead for a few more years.
Marked in the first six months of the year by rising rates, inflation and geopolitical tensions, recession fears are on the rise for 2022, casting a shadow over the outlook for global economies and markets in the second half. The results of a mid-year survey of 34 market strategists, portfolio managers, analysts and economists from Natixis Investment Managers (Natixis IM) and 15 of its affiliates, as well as Natixis Corporate and Investment Banking, show that nearly a quarter (24%) believe a recession is inevitable in the second half of 2022, when 64% believe it is only a possibility. Nine out of ten respondents believe that central bank policy will be the main driver of the market over the next six months.
“A decade of overreliance on free money has led to significant outperformance in growth stocks. This situation will be over in the near future. The main market driver at the end of 2022 will be central banks and lower inflation to lower the long-term cost of capital,” said Katy Kaminski, chief research strategist and portfolio manager at AlphaSimplex Group. LLC.
Inflation tops market risk
Low rates, low inflation and low volatility have driven market performance for over a decade. However, since the beginning of 2022, this unique confluence of factors has been completely revised. Inflation has been the catalyst for much of this change.
Thus, seven out of ten respondents see inflation as the biggest market risk for the second half of the year. Even if it has decreased slightly since its peak, 36% of respondents go so far as to attribute a score of 10 out of 10 to the level of risk linked to inflation.
Central banks also come into play, with 52% of respondents citing their policy decisions as a key driver of inflation. Separately, 46% of respondents believe that supply chain issues, which helped fuel inflation at the start of the pandemic, will continue to do so until the end of the year. However, less than one in four believe that inflation will remain high for a long time.
Recession is a real possibility, even inevitable
Faced with the prospect of higher interest rates and a tightening of monetary policy, experts put the recession second on the list of concerns, with 64% of them considering it a major risk.
Policy makers have many tools to fight inflation, and given the difficulty in finding the right time to implement their policy, the margin for error is slim.
For many, the question remains whether these efforts will thwart inflation, trigger a recession that might last two or three quarters, or result in stagflation that will last for years. With all the possible outcomes, it’s no wonder that more than half (55%) of respondents also cite central bank error as a key risk.
“The prospect of a recession is plunging markets into uncertainty, but a central bank-triggered recession would be the only way out of this inflationary environment. The markets might then rebound in a second step,” said Mabrouk Chetouane, head of global markets strategy at Natixis Investment Managers Solutions.
Geopolitics, war and oil
Inflation, recession and central bank policy play an important role in the perception of the experts surveyed regarding market risks. They also see global events, such as the war in Ukraine, as key risk factors. Thus, 65% of respondents rank geopolitics as the number one risk and almost half of them (47%) consider energy prices to be a major risk for the markets in the second half of the year.
Oil prices reached $120 a barrel at the start of the war in March and have since fallen back to $106 at the end of the second quarter of 2022, underscoring the link between geopolitical tensions and energy supply. Nearly half of the experts (49%) expect West Texas Intermediate crude oil to end the year in a range between $100 and $125. Furthermore, while 15% of them still believe that prices will break above the $125 mark, most (33%) expect prices to fall between $85 and $100.
What difference does a year (or two) make?
Among all the experts’ forecasts for the second half of the year, their opinion on the evolution of the Covid-19 pandemic is almost unanimous. While the latter had led to a global lockdown in 2022 and strict confinements in 2021, very few respondents (9%) believe that further Covid-related disruption will be a significant risk factor in the second half of the year, despite the highly contagious variants that are spreading around the world.
The value continues to shine
One of the key trends to emerge from the pandemic disruptions is the outperformance of value stocks. Low rates and low volatility have provided a rising tide that most stocks have excelled in over the past decade. Consequently, it was more difficult to find undervalued stocks.
Today, with rising rates and the return of volatility, value strategies have outperformed growth. Almost six in ten (58%) think this trend will continue for at least a few more months, while a quarter (24%) see it continuing for a few more years. Less than one in five (19%) believe the value trend has already come to an end.
“The opportunity set is changing rapidly. The new environment creates idiosyncratic opportunities that are more attractive investments than the broader indices. These opportunities can be found in multiple sectors,” said Chris Wallis, CEO, CIO and senior portfolio manager at Vaughan Nelson Investment Management.
Bond markets
One of the biggest shifts in the investment landscape in the first six months of 2022 has been the slow and steady rise in interest rates, with bond yields following suit. After closing 2021 at 1.512, a series of rate hikes – including a surprise 75 basis point hike in June – took yields to 2.975 on June 30, 2022.
Underscoring how closely they will watch central bank policies in the second half of the year, 73% of respondents think more hikes will follow: 36% believe US Treasuries will end the year between 3% and 3.5 %. The same share anticipates even more increases and expects rates to exceed 3.5% by the end of the year.
“This year, global bond markets suffered unprecedented losses, and few people might have thought of bonds as unprotected money. But there are signs that we have passed the peak of inflationary pressures, and it is time to find the opportunities available to us, for example in the financial, energy and industrial sectors,” said Adam Abbas, Portfolio Manager and Co-Head Fixed-Income at Harris Associates.
Given the perception that the experts interviewed have of this new bond landscape, there is no clear consensus on the implications this represents for investors. According to 27% of them, rate hikes might continue to drive down the value of bonds, creating attractive opportunities for sophisticated investors. In addition, 24% of respondents say that in such an environment, credit quality matters more than duration.
The end of an era
Experts see a world that has changed dramatically over the past six months. After a decade in which easy money provided by quantitative easing, low rates and low inflation propelled markets to positive gains, market conditions have evolved. This new normal is marked by greater volatility and greater uncertainty. The big question for most investors may well be how long this will last.
The full survey report is available at the following link: https://www.im.natixis.com/intl/markets/the-end-of-easy-money
