Investors unphased by recession


26 Feb 2024

Market remains bullish on blue-chip index despite UK economic woes, finds Andrew Holt.

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Market remains bullish on blue-chip index despite UK economic woes, finds Andrew Holt.

With the UK officially entering recession just two months into the year, will investors re-think their outlook for 2024?

Sanjay Raja, Deutsche Bank’s chief UK economist, said that recession was expected in the second half of last year, but the fall in activity was deeper than expected.

“Q4 2023 GDP shrunk by 0.3%, quarter-on-quarter, dragged lower by weaker household and government spending,” he said.

However, he added: “The bigger surprise was the fall in net trade with exports dropping by almost 3%, quarter on quarter.”

This raises big questions for those responsible for monetary policy. “While the Bank of England’s focus will likely remain on price data, the bigger drop in output and the politics of being in a technical recession will no doubt become uncomfortable especially with the bank rate at highly restrictive levels,” Raja said.

Indeed, all eyes will be on the Bank of England now as speculation and anticipation grows that the Old Lady of Threadneedle Street could be forced to reduce rates sooner than expected to instigate some much-needed growth.

The shoe has dropped

But Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said that the FTSE100 “seems nonplussed” about the UK economy dipping into recession.

“One reason for the market’s optimism is that this is a forward-looking measure, suggesting the outlook for company resilience hasn’t really changed too much on this news,” she said. “We’ve been waiting for the shoe to officially drop, and there will be some relief it’s finally happened.”

In fact, UK equities did see an interesting rise, as investors seemed to dismiss the news that the country has fallen into recession.

In the same way, the S&P500 hit record highs ahead of what is expected to be an abundant earnings season and a decline in the outlook for a global recession.

British bulls

In a similar ‘don’t panic’ mode, Matthew Williams, managing director and head of institutional EMEA at Franklin Templeton, said a UK recession isn’t something for investors to get too worried about.

“Notwithstanding the economic headwinds, there will always be interest in UK public and private markets,” Williams said.

In fact, the situation may make UK assets more appealing to investors. “A slowing economy may well represent opportunities for asset owners who are shrewd, fundamental investors, whether they be domestically or internationally located,” he said.

One overarching and enduring challenge for domestic investors “remains their local market allocations versus seeking diversification in other markets”, Williams said.

That said, he noted that we are also witnessing a meaningful rotation of asset owners seeking to participate in the levelling up agenda, seeking exposure to real assets that incorporate an impact framework.

Global confidence

And the idea that investors should not be worried about any signs of a recession, technical or otherwise, is highlighted in the latest Bank of America investor survey.

It reveals that global investors are at their most bullish for two years, no longer expecting a recession, as confidence grows in the resilience of the global economy.

“Expectations for strong macro and no recession keep investors in the ‘soft landing’ camp at 65%, with ‘hard landing’ probability fading to just 11%,” Bank of America said.

The fastest growing category for the economic and investment outlook is the ‘no landing’ scenario.

The survey showed 19% forecast no landing for the economy, dramatically up from 7% in the January survey – a big jump in one month.

Some 65% of respondents forecast a soft landing for the economy while 11% predict a hard scenario. In January, the numbers came out different: 79% predicted a soft or no-landing outlook, while 17% called for a hard landing.

The magnificent seven

But the survey did add an important caveat: that markets are pricing for a series of interest-rate cuts this year from the major central banks. But it should be noted that among others, the Federal Reserve has pushed back against this narrative.

According to Bank of America, investors have gone in big on technology stocks, with allocation to the sector at its highest since August 2020 and with investors believing that ‘long Magnificent 7’ – a basket of the seven biggest US companies by market value that includes Apple and Microsoft – meaning this is the most crowded investment now.

Looking at what else investors have their eye on, Bank of America reveals that second on the list is short China stocks. Chinese blue chips hit their lowest in five years during February, prompting the authorities in Beijing to roll out a series of measures to shore up the market and stem the outflows.


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