Market Views: After UK and Japan, where will recession strike next?

With the UK and Japan falling into technical recession, AsianInvestor asked fund managers which other economies might be at risk of entering negative growth in 2024.
Market Views: After UK and Japan, where will recession strike next?

Japan and the UK recently reported their second consecutive negative quarters of gross domestic product, fitting the widely agreed-upon definition of a recession.

Japan’s economic contraction is connected to its shrinking population. In 2022, the nation’s population declined by 800,000, marking the 14th consecutive year of contraction. With still fewer people making and consuming less, this development limits the country’s ability for economic growth.

In the UK, the economy is struggling due to inadequate population and wage growth, which are failing to offset a decline in consumer spending.

Although reasons may vary, these reports are symptoms of a global economy under influence of a relatively high interest rate environment, spurred on by inflation. As such, other economies might soon face hardships this year.

Looking beyond Japan and UK, AsianInvestor asked fund managers what other economies are most likely to face a recession in 2024 , and how asset owners could position their portfolios according to such a scenario.

While the US economy is a major concern, Germany and other parts of Europe are also among the highlighted areas to watch.

The following responses have been edited for brevity and clarity.

Antony Creighton, director and head of strategy Asia ex-Japan
Lazard Asset Management

Antony Creighton

Some European economies may face a “technical” recession this year, Germany most prominent among them, but we would expect any dip in economic growth to be relatively shallow and short.

One consequence of recent tightening in monetary policy over the last 18 months is that central banks again have room to manoeuvre and ease rates if faced with declining growth.

Given that these dips in economic activity are, we believe, to be short lived, we would not see them as a strong reason to reallocate capital.

Markets are likely to see through current challenges and anticipate an environment of lower inflation and interest rates.

A carefully selected portfolio of equities is a favourable place to be. While equity markets had a good run in 2023, they have barely moved when compared to January 1, 2022, despite higher earnings and improved balance sheets.

We expect returns to broaden out, away from hyper-concentration on global tech giants and back to quality businesses with great long-term prospects, which is unrecognized in their current valuations.

Bond markets continue to look relatively less attractive as developed markets cope with the impact of difficult public finances which affect the core sovereign bond yields of which all bonds are priced.

Idanna Appio, portfolio manager and senior research analyst
First Eagle Investment Management

Idanna Appio

In the US, unlike other major economies, consumers have largely spent their pandemic savings. Consumer balance sheets now appear much weaker.

Real liquid household savings for the bottom 40% of households by income are now below pre-pandemic levels.

Delinquency rates are surging on credit cards and auto loans, as high borrowing costs are transmitting to consumers.

Tight labour markets are allowing consumers to keep on spending.

However, with nominal wages now above output prices, firms could respond to shrinking margins by shedding labour; if they do so, this would likely drive a recession.

Fiscal policy—after contributing substantially to growth last year—will turn to a drag as the US moves into a contentious political cycle.

We remain focused on curating ownership in a set of resilient global businesses at modest valuations so they can withstand some disappointment on the macroeconomic front.

We hold gold as a potential hedge for tail risks in the portfolio as opposed to Treasury securities. Over its long history, gold has performed well in deflation and inflation scenarios.

In contrast, the US fiscal position looks increasingly unsustainable and the lack of term premium in longer-term Treasury securities suggests to us investors are not compensated for fiscal risks.

Louis Luo, senior investment director of multi-asset

Louis Luo

In the developed world, we see eurozone economies such as Germany face downside growth pressure in 2024.

Weakening manufacturing sector and tightening credit conditions on the back of the European Central Bank (ECB) tightening are hurting the economy.

Higher energy prices and more aggressive industrial policy from competitors are also headwinds to Germany’s energy-intensive, industrial, and export-focussed economy.

Fiscal policy is set to be a drag on growth in Germany and the broader eurozone.

Within Asia, we think Thailand economy is likely to underperform due to weaker than expected tourism recovery, largely explained by tepid return of Chinese tourists.

Against these macro backdrops, we are cautious on Eurozone equity and overweight German bunds as we expect ECB to turn more dovish.

Within emerging markets we recommend underweight Thai equity and Thai baht while deploying capital to where we see brighter growth outlook such as India and Korea.

Elliot Hentov, head of macro policy research
State Street Global Advisors

Elliot Hentov

Our base case expectations are for a modest global economic slowdown, relatively equally distributed across regions.

This implies a below-trend growth year for the US, a weakening of Chinese growth and most of emerging markets faring also below potential.

For countries where the starting point is low, there is a risk of falling into technical recessions, just as the UK and Japan have now done.

We only think parts of Europe are likely to experience a similar outcome, notably Germany and Central Europe.

However, since this does not represent a major turning point in the macro cycle, the implications for asset allocation are modest. In equities, overweight to the US remains justified based on growth outperformance.

In fixed income, we do expect central banks to start loosening monetary policy due to disinflation and weaker outturns, which makes favourably disposed toward the short end of the curve in both the USD and EUR space.

For emerging markets debt, we prefer hard currency given relatively cheap valuations, especially relative to investment grade credit.

In this regard, there are tailwinds from the fact that we avoided a synchronised recession in developed markets and expect a modest US dollar softening which is indirectly supportive too.

David Chao, global market strategist Asia Pacific ex-Japan

David Chao

It’s possible that global growth could miss median estimates for 2024 due to tighter global monetary policies and fading pandemic-era dynamics.

Developed market (DM) growth is likely to underwhelm this year though avoid deep recession. We continue to expect a bit of a bumpy landing for the world economy.

While global manufacturing activity appears to have bottomed out, export orders around the world remain weak and retail sales have disappointed recently.

The European industrial sector looks most vulnerable.

Consequently, we see the manufacturing-heavy economies of Germany and Italy make them the countries most at risk of falling into technical recession.

Given divergent economic conditions across the Eurozone, the ECB has a more difficult calculus, and the risk of policy error may well be higher.

That said, a prolonged and significant decline in economic output in the region is not likely and rate cuts will facilitate a recovery towards trend growth within the next 12 months.

We think that markets are, by and large, already pricing for the risk of light recession across major DMs (perhaps excluding the US).

The announcement of a technical recession in the UK and Japan were largely shrugged off, as investors look ahead to rate cuts and an eventual recovery.

As always, we believe it’s critical to be well diversified across and within the major asset classes, especially in what is expected to be a year of transition.

Guillermo Felices, global investment strategist
PGIM Fixed Income

Guillermo Felices

We do not currently forecast recessions in any of the major economies, but expect the euro area and the UK to be the weakest major economies.

The eurozone is not in a technical recession as is the case in Japan and the UK, but it has avoided one by a whisker with growth registering -0.1% in Q3 23 and 0.0% in Q4 23.

We expect a 40% probability of recession in the Eurozone area over the next 12 months, and a 25% probability in the US.

On balance this is a good environment for fixed income, with the prospect of lower yields in bond markets supportive of bond prices.

In sovereign bonds, we prefer to be broadly flat given risks on both sides of our central scenario.

We favour being overweight US rates of maturities from 0-1 year where yields are high around 5% and underweight the 2-5-year sector, while being overall neutral duration.

In credit, we like being market weight US corporate credit and have a slight long bias in European corporate credit and emerging markets corporates and sovereigns, except for emerging markets sovereign investment grade where spreads are very tight.

Given our cautious view on duration we prefer shorter durations in credit too.


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