The risk of a global recession remains low despite the economy being vulnerable to further shocks, according to HSBC’s global chief strategist.
Joseph Little, global co-CIO, HSBC global asset management, said he remains comfortable with the bank’s pro-risk stance in multi-asset portfolios, even after this month’s sell-off.
He conceded that the global economy is in a difficult place and that the recent economic data has been “fairly soft”, particularly from Europe and China. Further, he believes that headwinds from a downturn in the industrial cycle and uncertainty around trade tensions make it susceptible to more geopolitical blows.
However, Little believes investor pessimism could be overdone and there are reasons to be positive.
He said: “US activity is being buttressed by a solid labour market, while the bulk of the weakness in Eurozone data has been driven by a large downturn in the industrial sector. While there is no obvious sign of a turnaround here, the services sector – which accounts for the bulk of activity – remains robust.
“Meanwhile, the contraction in Q2 UK growth was primarily due to an unwinding of stockpiling in Q1 ahead of the original March 31 Brexit deadline. Weak China activity data for July is perhaps more concerning, although this followed an unexpectedly strong June set of numbers. There is also scope for further policy easing in the coming months to help stabilize growth.
“Importantly, global muted inflation trends keep the door open to further monetary policy easing elsewhere. The Fed is likely to cut interest rates further this year, while the ECB is expected to announce a stimulus package at their September meeting. Fiscal policy could play an increasing role. For example, the UK government has signalled a large programme of spending and tax cuts.”
While the bond markets have been beaten up and remain a source of concern among money managers, Little added that things have to get worse before recession warnings become meaningful.
“Large market activity during a month of poor liquidity, such as August, suggests chances of a reversal in yields. There is no precedent for an inversion at such low government bond yields, but yield curves have to invert further before they reach the levels that have preceded previous recessions”.
Little said that, despite the sell-off in risk assets this month, equity markets have performed well so far this year and the valuation gap between equities and relatively expensive bonds continues to increase.
He added: “However, given the downside risks to growth, we advocate a more cautious use of our tactical – i.e. short-term - risk budget in portfolios.”
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