Worrying signs are piling up that further turbulence is yet to come, as key indicators point to a potential recession. This could deepen the market rout triggered by the Federal Reserve leading a hawkish shift among central banks and the war in Ukraine.
The US Treasury yield curve has collapsed to a near inversion – a situation where short-term rates rise above longer-term rates, which has often preceded a slowdown. In Europe, energy costs have reached unprecedented levels, as sanctions against Russia exacerbate the global commodity crisis.
“Over time, the top three factors that tend to push the US economy into a recession are an inverted yield curve, some sort of commodity price shock, or Fed tightening,” Ed said. Clissold, chief US strategist at Ned Davis Research. , there seems to be potential for all three to happen at the same time.”
Food prices have already risen above levels that have contributed to past uprisings and the outbreak of war between Russia and Ukraine — which together account for 28% of global wheat exports and 16% of corn, according to UBS Global Wealth Management — only adds to the risks.
Meanwhile, the Fed is unlikely to intervene to prevent the selling, according to George Saravelos, global head of currency research at Deutsche Bank. Indeed, the root cause of the current surge in inflation is a supply shock, rendering the playbook used to fight the downturns over the past 30 years all but useless.
The likelihood of a U.S. recession next year could be as high as 35%, according to economists at Goldman Sachs Group Inc., who cut the bank’s growth forecast due to soaring oil prices and fallout from the war in Ukraine. Bank of America Corp. said the risk of an economic slowdown is low for now, but higher next year.
With a sharp and widespread economic downturn looming on the horizon, here’s a guide on how to prepare based on conversations and notes from fund managers and strategists.
Exodus from Europe
While the year started with bullish bets on European equities, that is now history. Record inflation, a surprisingly hawkish pivot from the European Central Bank and Vladimir Putin’s attack on Ukraine have changed everything, and a mass exodus from equities from the region is in full swing.
Strategists of all asset classes consider the Old Continent to be the most exposed to war-related risks, in particular because of its geographical proximity and its energy dependence on Russia.
“For the euro zone, there is a high probability of a recession if the situation does not normalize quickly,” said Christophe Barraud, chief economist at Market Securities LLP in Paris. Risks include the confidence shock of the war, the hit to household consumption from rising food and energy prices and amplified supply chain disruptions caused by the conflict, it said. -he declares.
Even enthusiastic bulls, such as UBS Global Wealth Management, downgraded Eurozone stocks. Amundi SA, Europe’s biggest asset manager, said on Friday that a temporary recession in the economy and profits on the continent was now possible.
The silver lining is that most of the bad news for Europe may already be priced in, revealing pockets of opportunity. Bank of America Corp. strategists raised cyclical stocks relative to defensive stocks in the region, as well as automakers.
“The recent underperformance leaves them at a more realistic price,” they said.
Mining and energy are the only sectors that have weathered the rout in European equities so far, and this is likely to continue – unless rising prices destroy demand in the process.
“The energy sector in equities is one of the areas that offers shelter,” Nannette Hechler-Fayd’herbe, global head of economics and research at Credit Suisse Group AG, told Bloomberg TV. “In the best case, growth resumes and energy is supported by that. In the worst case, it is prices that continue to rise and the energy sector also continues to be supported.
In the emerging landscape, the UK was touted as a potential safe haven due to the abundance of commodities stocks in the FTSE 100 index. While the benchmark MSCI global equities index fell 11 % this year, the UK large-cap gauge has lost just 3%.
Energy and materials companies, along with the traditionally defensive healthcare and utilities sectors, together account for 58% of the FTSE 100 – index members like Shell Plc and Glencore Plc rose amid the fears of supply squeeze. That figure drops to around 31% for MSCI’s global benchmark.
Opaque industries such as agricultural chemicals are also doing well, and the continued tightening of fertilizer markets due to the war in Ukraine could bode well for companies like Yara International ASA, OCI NV, Mosaic Co. and Nutrien. ltd.
U.S. staple foods and retail have also historically outperformed during periods of stagflation, UBS strategists Nicolas Le Roux and Bhanu Baweja wrote in a note.
Alcohol and chocolate
To be sure, not all yield curve inversions, tightening cycles and commodity spikes lead to economic contractions. But the risks are there, and investors looking to hedge should act, even though it may already be too late.
The U.S. market anticipates the onset of recessions by an average of seven months and bottoms out an average of five months before a recession ends, according to CFRA data dating back to World War II.
When the National Bureau of Economic Research tells us we’re in a recession, “it’s time to buy,” said Sam Stovall, chief investment strategist for CFRA.
And if you’re unsure what to buy amid market uncertainty, Greenmantle’s Dimitris Valatsas recommends a home.
“The historical evidence for the last global inflationary period of the 1970s is clear,” he said. “In real terms, in major economies, housing outperforms all other major asset classes, including equities.”
But to keep a foothold in the stock markets, it’s worth keeping an eye out for convenience providers and what people can’t live without, like must-have tech, like Microsoft Corp.
When the crisis hits, “consumers usually opt for small indulgences,” said Edmund Shing, chief investment officer at BNP Paribas Wealth Management. “The purchase of new cars or smartphones suffers, while alcohol and chocolates tend to benefit.”
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