19th February 2016
Financial markets are over-estimating the chance of a global recession, with one investment firm saying there is just a 20% chance of a downturn.
NN Investment Partners said equity and high yield markets have factored in recession probabilities of 50% and 75% respectively but believes this is too high.
Valentijn van Nieuwenhuijzen, head of multi-asset at NN Investment Partners, said it is difficult to say the likelihood of a recession is any more than 20%.
‘Developed market growth momentum fell back somewhat to around a 1%-annualised pace during the second half of last year, but neither the level of growth nor the degree of the fall-back looked alarming from an historical perspective. It falls easily within the range of movement in the business cycle that can be described as noise rather than clear change of direction,’ he said.
He added that equity valuation were down 20% from recent highs ‘implying an increased risk of an earnings recession’ but he does not believe this will impact outside of commodities.
‘We doubt this will happen outside the commodity sectors as the consumer sector is supported by low oil, low interest rates and an improving labour market,’ he van Nieuwenhuijzen.
‘We also see little earnings risk for the health care sector. In addition, central bank support will help market sentiment. For all these elements we maintain a neutral stance, instead of throwing in the towel and follow the herd over the cliff.
‘Nothing guarantees that data surprises will not weaken further but the facts on the ground are certainly not yet aligned with a base-case recession scenario.’
NN Investment Partners has reduced its underweight in emerging markets from medium to small ‘because of dovish Fed expectations, weaker US dollar, relative economic data, very negative positioning and some stability in cyclical commodity prices’.
It has cut the eurozone to ‘neutral’ and from a sector perspective ‘has shifted its defensive bias by removing the overweight in IT’.