The Looming Recession

The markets are filled with optimism now, but as the equity markets storm ahead, is there a dark ominous cloud of recession looming in the background?

2019 was a bumper year for the S&P 500, rising 28.9% in 2019, while the MSCI World was up 23% in dollar terms. The raging bull market still shows no signs of stopping……or does it?

Whether you agree or disagree with the current state of the market, you just need to look at key market fundamentals to gauge a sensible opinion. 

Citigroup’s chief U.S. equity strategist, Tobias Levkovich, has a few concerns. His major worry is based on a Federal Reserve survey of senior loan officers, in which banks report if they are easing or tightening credit conditions. 

When the report shows the latter, it tends to signal the economy will run into challenges in about nine months. He notes how January’s 2019 loan report of tighter conditions, was followed by manufacturing contraction in September 2019. This same tightening has just happened in November 2019, so will likely lead to a following contraction in 2020.

Almost half of the world’s large investment funds, such as pension schemes, endowments and insurance firms, think the stock market is due for a correction in 2020, according to a survey of 500 funds worth a collective $15 trillion.

With institutions pulling away from equity markets, where are they placing capital? The hands down winner was off-market “alternative” investments, a catch-all term for property, private equity, infrastructure, certain hedge fund types and illiquid debt funds. Portfolio allocations increased from 17.5% to 18.7% for these type of investments — an implied net investment of around $180 billion, based on total assets of $15 trillion in the survey.

Andrew Benton, head of northern Europe for Natixis Investment Managers, said that big-money investors “expect a global slowdown to come sooner rather than later”. 69% of respondents said countries interfering in one another’s elections is becoming an increasing problem around the world, and 64% said the US presidential poll next year will be a major source of market volatility.

Institutions, across the globe, have increased appetite for yield substitution away from equity markets, with a long-term trend now moving to private debt and equity instruments. While a lot of institutions have begun to act; some institutions still remain neutral.

What is clear is this….. timing the market can be a difficult and near impossible task, but 2020 is set to be an interesting year with the current geopolitical environment expected to weigh negatively on the financial markets.