In the wake of a sturdy first half characterised by ebbing inflation, stellar tech-driven stock market performance, and soaring bond yields, economists and investment strategists predict a reduced recession risk for the latter half of 2023, a survey by Natixis Investment Managers shows. “Recession is still a real possibility, but most expect a softer landing,” said Mabrouk Chetouane, head of global market strategy at Natixis IM.
Gathering perspectives from 32 market experts and economists at Natixis and its affiliates, the survey disclosed that while half the respondents perceive the recession threat as low for the second half, there is an undercurrent of caution regarding an intensifying market climate and an ambiguous outlook for the latter half of the year.
A considerable 72% express apprehension about potentially persistent inflation, with 38% envisaging sustained high rates and 66% expressing anxiety over corporate earnings, the mid-year survey discloses.
“Inflation is cooling off, but we aren’t through the woods yet,” said Chetouane. “Strong consumer spending, inflated cost of services, and geopolitical tensions may keep inflation lingering for longer which will result in higher rates for some time yet. Strategists generally think it will take until 2025 until targets are met.”
A mere 6% sees 2023 recession as inevitable
After the first half of 2023 took investors by surprise, a substantial change in sentiment is seen. Previously in November 2022, 59% of institutional investors deemed a 2023 recession “inevitable” and 54% saw it as a crucial step to curb inflation. Now, however, the economic landscape is markedly different, with strong market returns, attractive bond yields, and global inflation tapering down to 3% in the US.
The survey suggests that for the remainder of 2023, a mere 6% of strategists see a recession as “inevitable”, 53% consider it a “distinct possibility”, and 9% deem it “highly unlikely”.
While strategists worry about the potential impacts of geopolitics (72%) and central bank policies (72%) on the markets, a quarter dismiss geopolitics as “noise”. Concerns about bank policies revolve around the duration and level of restrictive rates before inflation returns to target levels.
Despite apprehension around corporate earnings and consumer spending slowdown for 50% of respondents, 25% remain optimistic, envisaging a boost from earnings and increased consumer spending.
US seen as best bet
Weighing the opportunities and obstacles, 34% of strategists pinpoint the US as the best bet for the rest of the year, with 22% favouring either Japan or emerging markets (excluding China). Europe and China attract less optimism at 16% and 6%, respectively, with the UK garnering no support.
In terms of capitalisation, a strong consensus favours large caps (81%) over small caps (19%), largely attributed to stricter credit standards following the US banking crisis in th first quarter. Opinions are evenly split on whether growth or value will outperform by the year-end.
Inflation concerns cast shadow
Notably, after a 15-year stint of low and negative yields, yield made a comeback in 2023. However, lingering inflation concerns (72%), fears of higher-than-expected rates (38%), and worries about corporate defaults and downgrades (38%) cast a shadow over fixed income investors. Conversely, 56% of those surveyed project long-duration bonds to outperform short-duration bonds by the end of 2023.
Markets rallied significantly in the first half, primarily due to tech’s resurgence. However, the tech rally is expected to moderate, and broader equity markets are projected to recalibrate to reflect fundamentals in the second half.
Fraud and scams seen rising due to AI
A high potential for fraudulent behaviour is unanimously recognised among strategists in the context of AI-driven investment opportunities. Some 69% expect to see an increase in day-trading due to AI. Despite the positives, those surveyed identified the negative implications of AI in markets. Much like the concern that AI can be used to manipulate political sentiment and voter behavior, strategists worry that investor behavior and market sentiment could be manipulated by bad actors, and 100% of strategists say AI will increase the potential for fraud and scams, Natixis said.
When it comes down to it, strategists are split on the investment opportunities presented by AI itself. Half think it will drive long-term growth, but the same number are looking at the build up and think it’s a bubble.
‘Don’t be complacent’
“Compared to expectations at the end of 2022, 2023 has been surprisingly positive so far, but investors need to stay alert to ongoing headwinds to prevent complacency,” said Chetouane. “Inflation has gone from an all-consuming concern to a manageable situation in most developed markets, but it could take some time before aggressive targets set by central banks are met.
“Big tech helped equities come roaring back in the first half of the year but, while few predict a major downturn, most are concerned about corporate earnings across H2 and expect the rally to fade away by the end of the year. Recession is still a real possibility, but most expect a softer landing. The successes of H1 may dissipate, but our strategists and economists still believe there are good opportunities if you look carefully,” he said.