Investors are buckling up for a global recession, an influential survey of some of the world’s largest fund managers shows.
The risk of a global downturn is now at its highest in at least four years, according to investors surveyed by Absolute Strategy Research.
Global bond markets have rallied in recent weeks as central banks respond to signs that major economies are looking increasingly fragile. Investors ramped up purchases of government debt last week after Christine Lagarde’s nomination as the next European Central Bank president, betting that the IMF chief’s appointment would mean the era of ECB stimulus is set to continue.
ASR’s findings, which are based on a survey of more than 200 institutions controlling a combined $4tn of assets, suggest that the bond rally is not a blip.
The survey indicates that investors anticipate a 45 per cent chance of a global recession in the coming 12 months, the highest since the survey began in 2014. Investors have also shifted their views on where bonds markets are headed next. The majority now expect short-term US bond yields to be lower in a year’s time — a reversal since March, when more than half were banking on higher yields.
Expectations that longer-dated yields and record-low yields in Europe will rebound have all but disappeared.
The key question is whether investors are too pessimistic. A strong US jobs report on Friday derailed expectations that the Federal Reserve would cut interest rates by a hefty 0.5 percentage point this month. Even so, markets continue to price in a 0.25 point rate reduction.
The bullishness on government debt, which typically indicates growing alarm over the economic outlook, is accompanied by a more cautious outlook for equity markets. ASR’s survey points to a small decline in global stocks and corporate earnings in the coming year.
Even so, with US indices recently trading at all-time highs, equity investors are yet to reflect the gloom in bond markets, according to David Bowers, ASR head of research.
“If the bond market is really telling us something, at what point will the equity market wake up?” he said.
“The survey embodies a fundamental tension in markets,” he added. “With recession risks running so high, you would expect a worse outlook for earnings. But the implicit assumption is that earnings risks for equities are not that great.”
Fund managers are also more bearish on the dollar than at any point in the past five years, the survey showed. A weaker US currency would be good news for precious metals, with nearly two-thirds of investors expecting gold prices to rise in the next year.