For the previous two quarters, my colleagues and I have been trying to navigate our way through the ‘polycrisis’ - a confluence of pressures which we believe could force central banks into overtightening and trigger sharp recessions. That polycrisis has now left markets oscillating between resilience and fragility: abundant liquidity and robust labour markets on the one hand, and the lagged effects of policy and tightening lending standards on the other.
Three themes for Q3
Our Q3 Outlook highlights three key themes that we expect will dominate this quarter. You can watch Fidelity CIO, Andrew McCaffery, lay out each of these in the video available on the following link.
Quarterly Outlook: Between resilience and fragility (fidelity.fr)
Resilience now, fragility later
The ‘best-flagged recession in history’ still isn’t upon us. Excess savings accrued during the pandemic, as well as continued tightness in labour markets, mean that financial conditions are taking longer than expected to bite. But that recession will come when the lagged effects of policies eventually take hold. Resilience now is sowing the seeds for fragility down the line.
A cyclical recession, in which unemployment in the US rises to 4.4-6.5 per cent over the next 12 months, is the most likely outcome. A soft landing now looks beyond reach.
The long game in China
After a bumper start, China’s rebound since the end of its zero-Covid policy is underwhelming investors. Earnings estimates are on a downward path, youth unemployment is at record highs, and Chinese consumers haven’t resumed their zeal for spending.
This does not mean China’s rebound has run its course. It is perhaps no surprise that consumer confidence is muted after three years of severe restrictions. And there are positives elsewhere, including accommodative monetary and fiscal policies and an improving regulatory backdrop. Further stimulus measures may arrive soon. Meanwhile, the disjunct between the market’s expectation and the reality of the recovery has left Chinese equities trading at a significant discount.
Click on the link below to read the full article, view the Q3 investment implication at a glance, and watch the video.
Quarterly Outlook: Between resilience and fragility (fidelity.fr)