According to HSBC Asset Management, the U.S. will experience a slowdown in the fourth quarter, which will be followed by a "year of contraction and a European recession in 2024."
Recession indicators are "flashing red" for many economies, according to the asset manager of the British banking behemoth, while monetary and fiscal policies are out of step with stock and bond markets.
While some areas of the economy have so far shown resilience, according to Joseph Little, global chief strategist at HSBC Asset Management, the balance of risks "points to high recession risk now," with Europe lagging behind the U.S. but the macro trend largely "aligned."
“We are already in a mild profit recession, and corporate defaults have started to creep up too,” Little said in the report seen by CNBC.
“The silver lining is that we expect high inflation to moderate relatively quickly. That will create an opportunity for policymakers to cut rates.”
HSBC Asset Management anticipates that the U.S. Federal Reserve will cut interest rates before the end of 2023, with the European Central Bank and the Bank of England following suit the following year, despite the hawkish stance taken by central bankers and the apparent stickiness of inflation, particularly at the core level.
At its June meeting, the Fed paused its cycle of monetary tightening, leaving its fed funds rate target range at between 5% and 5.25%, but it also hinted that two additional rises could be anticipated this year. The FedWatch tool from CME Group shows that market pricing just barely expects the fed funds rate to be one quarter of a percentage point higher in December of this year.
Little of HSBC said it is crucial that the recession "doesn't come too early" and lead to disinflation since central bankers won't be able to lower rates if inflation remains markedly above target, as it is in many big nations.
“The coming recession scenario will be more like the early 1990s recession, with our central scenario being a 1-2% drawdown in GDP,” Little added.
A "difficult, choppy outlook for markets" is what HSBC anticipates will come as a result of the crisis in Western nations for two reasons.
“First, we have the rapid tightening of financial conditions that’s caused a downturn in the credit cycle. Second, markets do not appear to be pricing a particularly pessimistic view of the world,” Little said.
“We think the incoming news flow over the next six months could be tough to digest for a market that’s pricing a ‘soft landing.’”
Little said that this recession won't be long enough to "purge" the economy of all inflation pressures, so developed economies would have to deal with a regime of "somewhat higher inflation and interest rates over time."
“As a result, we take a cautious overall view on risk and cyclicality in portfolios. Interest rate exposure is appealing — particularly the Treasury curve — the front end and mid part of the curve,” Little said, adding that the firm sees “some value” in European bonds, too.
“In credit, we are selective and focus on higher quality credits in investment grade over speculative investment grade credits. We are cautious on developed market stocks.”
High levels of domestic household savings should sustain domestic demand as China emerges from many years of strict Covid-19 lockup measures, according to HSBC, while issues in the real estate sector are bottoming out and government fiscal efforts should generate jobs.
Little also said that because consumer prices rose by a two-year monthly low of 0.1% in May, further monetary policy easing is possible, and GDP growth "should easily exceed" the government's modest 5% target this year, due to the relatively low inflation rate.
For this reason, HSBC continues to be overweight Chinese stocks, and Little stated that the "diversification of Chinese equities shouldn't be underestimated."
“For example, value is outperforming growth in China and Asia. That’s the opposite of developed stock markets,” he added.
Little stated that India, along with China, is the "main macro growth story in 2023" as the country's economy has rebounded strongly from the pandemic thanks to rebounding consumer spending and a healthy services sector.
“In India, recent upward growth surprises and downward surprises on inflation are creating something of a ‘Goldilocks’ economic mix,” Little said.
“Improved corporate and bank balance sheets have also been boosted by government subsidies. All the while, the structural, long run investment story for India remains intact.”
(Source:www.cnbc.com)
Recession indicators are "flashing red" for many economies, according to the asset manager of the British banking behemoth, while monetary and fiscal policies are out of step with stock and bond markets.
While some areas of the economy have so far shown resilience, according to Joseph Little, global chief strategist at HSBC Asset Management, the balance of risks "points to high recession risk now," with Europe lagging behind the U.S. but the macro trend largely "aligned."
“We are already in a mild profit recession, and corporate defaults have started to creep up too,” Little said in the report seen by CNBC.
“The silver lining is that we expect high inflation to moderate relatively quickly. That will create an opportunity for policymakers to cut rates.”
HSBC Asset Management anticipates that the U.S. Federal Reserve will cut interest rates before the end of 2023, with the European Central Bank and the Bank of England following suit the following year, despite the hawkish stance taken by central bankers and the apparent stickiness of inflation, particularly at the core level.
At its June meeting, the Fed paused its cycle of monetary tightening, leaving its fed funds rate target range at between 5% and 5.25%, but it also hinted that two additional rises could be anticipated this year. The FedWatch tool from CME Group shows that market pricing just barely expects the fed funds rate to be one quarter of a percentage point higher in December of this year.
Little of HSBC said it is crucial that the recession "doesn't come too early" and lead to disinflation since central bankers won't be able to lower rates if inflation remains markedly above target, as it is in many big nations.
“The coming recession scenario will be more like the early 1990s recession, with our central scenario being a 1-2% drawdown in GDP,” Little added.
A "difficult, choppy outlook for markets" is what HSBC anticipates will come as a result of the crisis in Western nations for two reasons.
“First, we have the rapid tightening of financial conditions that’s caused a downturn in the credit cycle. Second, markets do not appear to be pricing a particularly pessimistic view of the world,” Little said.
“We think the incoming news flow over the next six months could be tough to digest for a market that’s pricing a ‘soft landing.’”
Little said that this recession won't be long enough to "purge" the economy of all inflation pressures, so developed economies would have to deal with a regime of "somewhat higher inflation and interest rates over time."
“As a result, we take a cautious overall view on risk and cyclicality in portfolios. Interest rate exposure is appealing — particularly the Treasury curve — the front end and mid part of the curve,” Little said, adding that the firm sees “some value” in European bonds, too.
“In credit, we are selective and focus on higher quality credits in investment grade over speculative investment grade credits. We are cautious on developed market stocks.”
High levels of domestic household savings should sustain domestic demand as China emerges from many years of strict Covid-19 lockup measures, according to HSBC, while issues in the real estate sector are bottoming out and government fiscal efforts should generate jobs.
Little also said that because consumer prices rose by a two-year monthly low of 0.1% in May, further monetary policy easing is possible, and GDP growth "should easily exceed" the government's modest 5% target this year, due to the relatively low inflation rate.
For this reason, HSBC continues to be overweight Chinese stocks, and Little stated that the "diversification of Chinese equities shouldn't be underestimated."
“For example, value is outperforming growth in China and Asia. That’s the opposite of developed stock markets,” he added.
Little stated that India, along with China, is the "main macro growth story in 2023" as the country's economy has rebounded strongly from the pandemic thanks to rebounding consumer spending and a healthy services sector.
“In India, recent upward growth surprises and downward surprises on inflation are creating something of a ‘Goldilocks’ economic mix,” Little said.
“Improved corporate and bank balance sheets have also been boosted by government subsidies. All the while, the structural, long run investment story for India remains intact.”
(Source:www.cnbc.com)
