The Natixis Centre for Investor Insight, a global research initiative focused on issues shaping the investment landscape, has just released its mid-year survey of more than 30 strategists, conducted at the end of June.
After a robust start to the year with inflation easing and bond yields reaching 15-year highs, economists and investment strategists feel more confident that the recession risk will be receding in the second half of 2023, a new survey by Natixis Investment Managers shows.
Drawing on the insights of 32 market strategists, portfolio managers, research analysts and economists at Natixis Investment Managers and 13 of its affiliated investment managers, as well as Natixis Corporate and Investment Banking, the survey reveals that 50 per cent rate recession as a low risk in the second half of 2023 while 6 per cent believe a recession is inevitable.
With inflation easing, dropping to 3 per cent in the US and 5.5 per cent in the eurozone, only 22 per cent of strategists surveyed said inflation is a “high risk” in the second half of the year, although the majority of strategists believe it will take 18 to 24 months before central bank targets are met. “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 at Natixis IM.
Looking at the headwinds and opportunities, 34 per cent of the strategists said the US is best positioned for the rest of the year, and 22 per cent think either Japan or emerging markets (excluding China) will be the winner, the survey found. Only 16 per cent think Europe will be the leading market, while 6 per cent believe it will be China. None of the strategists are backing the UK. There is also a strong consensus that large caps (81 per cent) will outperform small caps (19 per cent), in part due to tighter credit standards set in the wake of the banking crisis in the first quarter, the survey shows.
After 15 years of low and negative yields, yield returned in 2023. In the second half of 2023, 47 per cent believe that US Treasury yields will come in at 3.5 to 4 per cent while 41 per cent see rates receding. There are also concerns for fixed income investors, with 72 per cent worrying that inflation may linger longer than expected. With all things considered, 56 per cent of those surveyed think that long-duration bonds will outperform short-duration bonds by the end of 2023.
Equity rally is likely to cool
Markets rallied in the first half of the year, largely due to the re-emergence of tech and excitement about artificial intelligence (AI). In Japan, corporate reforms and a focus on sustainable growth saw the Nikkei achieve returns of 27.91 per cent by June 30 – the biggest gain in 33 years. However, none expect the tech rally to intensify, the survey reveals. Half of the respondents think that equities more generally will cool off in the second half of 2023 and prices will dip to reflect the fundamentals.
On AI, 88 per cent believe that it can unlock previously undetectable investment opportunities and 69 per cent believe it will accelerate day trading. All of the strategists surveyed believe that it will increase potentially fraudulent behaviour. “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,” Chetouane said.