A survey of market strategists, portfolio managers, research analysts and economists and investment managers affiliated to Natixis IM shows rising sentiment
With inflation easing, bond yields at 15-year highs, and some strong returns in equity markets, investment industry professionals are showing increased confidence that recession can be avoided.
A Natixis Investment Managers poll reveals that half of respondents believe there is a low risk of recession in the second half of 2023, but they remain cautious due to intensifying market headwinds.
Inflation is central to every outlook and most respondents (72%) think it will be elevated for longer than expected with 38% believing that interest rates will have to stay higher for longer as a result.
While only 22% of strategists surveyed say inflation is a “high risk” in the second half of the year, 38% do not believe inflation targets will be met until 2025, and 9% say they may not be met until at least 2026.
With the first half of 2023 giving investors some surprises, just 6% of strategists believe a recession is “inevitable”, 53% say there is a “distinct possibility”, and 9% think recession is “highly unlikely”. This is a turnaround from November 2022 when 59% of institutional investors believed recession in 2023 was “inevitable” and 54% said recession was “absolutely necessary” to curb inflation.
Major headwinds
While inflation remains a key concern, the biggest headwinds cited by respondents are geopolitics (72%) and central bank policy (72%).
Two thirds are also concerned about corporate earnings and overall, there is a sense that investors should not be complacent.
“Inflation is cooling off, but we aren’t through the woods yet. 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,” said Mabrouk Chetouane, Head of Global Market Strategy, Solutions, Natixis IM.
Where to win
For investors to have the best potential for returns, 34% of the market strategists say the US is best positioned for the rest of the year while 22% think either Japan or emerging markets (excluding China) will be the winner.
Europe (16%) and China (6%) are out of favour and none of the strategists are backing the UK.
There is strong consensus that large caps (81%) will outperform small caps (19%), in part due to tighter credit standards set in the wake of Q1’s banking crisis.
Poll participants were split 50/50 on whether growth or value stocks will outperform in the second half of 2023.
Bonds vs equities
Asked about their expectations for bonds:
- 47% think US Treasury yields will come in at 3.5%-4%
- 41% see rates receding, leading 28% expecting 10-year Treasuries to drop to the 3%-3.5% range
- 13% think rates could move to between 2.5%-3%
For equities, where the latest tech rally has had significant weight, none of the strategists think tech’s gains will intensify, 31% expect it to “continue steadily” and 6% of strategists think the “bubble will burst.” More generally, half of respondents think equities will cool off through this second half of the year with prices dipping to reflect the fundamentals.
“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,” concluded Chetouane.
