Recession unlikely, but markets should brace for a bumpy landing

Invesco's chief global market strategist sees developed economies gaining ground against inflation, though a slowdown's afoot

Recession unlikely, but markets should brace for a bumpy landing

As masters of monetary policy around the world slowly but surely bring inflation to heel, investors in developed economies should take care and stay strapped in for a bumpy landing.

That’s according to Kristina Hooper, Invesco’s chief global market strategist, in the firm’s recently published midyear outlook.

“Many developed economy central banks continue to focus their efforts on curtailing the worst inflation experienced in decades,” Hooper said, noting that downward pressure on inflation has come at a cost of meaningfully slower global growth and a handful of financial accidents, including failures among several US regional banks. “[A]gainst this backdrop, we see some resilience in many economies, especially in services.”

A rocky recovery?

Invesco’s base-case scenario for the rest of 2023 projects a relatively brief and shallow economic slowdown, with inflation continuing to moderate and policy tightening nearing its end.

Hooper maintained that the US is likely to swerve a significant broad-based recession, with economic activity remaining relatively resilient even amid weakness in the second half of the year.

“In the US, we believe rate hikes are ending and inflation will continue to fall significantly, albeit imperfectly,” she said. “As we enter 2024, we expect a more positive growth outlook to unfold as the US economy recovers.”

Across the pond, she said Invesco expects the Eurozone and the UK will follow roughly the same trajectory as the US, but with a lag. Europe has managed to sustain its economic momentum thanks to a variety of forces, Hooper said, though that’s expected to flag as increasingly tight financial conditions in the region put pressure on credit growth over time.

Despite ‘bumpy takeoff,’ China still a bright spot

As for China, Hooper is watching for a “bumpy takeoff” as relaxed Covid-19 restrictions have laid the groundwork for a meaningful but uneven recovery. That’s largely benefiting the service industry as the manufacturing sector disappoints against a backdrop of slowing global growth.

“Nevertheless, China remains a bright spot with subdued inflation and a robust growth outlook,” she said. “We expect continued accommodation from the People’s Bank of China and some fiscal stimulus.”

While its near-term economic outlook includes a monetary policy peak, signs of disinflation, and a relatively short global slowdown, Invesco anticipates markets will soon look past the valley and begin to believe in a future economic recovery.

In the near term, Hooper is anticipating somewhat defensive asset classes such as high-quality corporate bonds and structured credit to outperform. Given the current backdrop, she added, the immediate prospects for growth and quality equities – particularly technology, consumer products and services – are also bright.

“We also favor Asia equities given our growth outlook for China and other Asian countries,” she said.

“However, we expect markets to soon discount an economic recovery that could lead to the outperformance of more ‘risk on’ asset classes such as high yield credit and cyclical and smaller-cap equities.”