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Looming tailwinds could shake up soft landing relief

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By Jessica Penny
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4 minute read

While a robust start to the year has many strategists agreeing that the risk of a recession is reduced, an investment manager warns that the market needs to remain alert.

According to the latest findings from Natixis Investment Management, economists and investment strategists are more confident that the risk of a recession is receding in H2 2023.

The survey, which drew on the insights of market strategists, portfolio managers, research analysts, and economists across Natixis and 13 of its affiliated investment managers, reported that 50 per cent of respondents deem a recession as low-risk in H2.

According to the investment manager, markets delivering solid returns, bonds generating attractive yields, and inflation beginning to ease around the world, has given strategists less cause for concern.

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As such, only 6 per cent of institutional investors now believe a recession in 2023 is “inevitable”, compared to 59 per cent in November last year.

Nonetheless, many respondents are still opting to tread lightly, warning that market headwinds are intensifying.

Namely, nearly three- quarters (72 per cent) were concerned that inflation may linger longer than expected, with 38 per cent conceding that rates could stay high for longer than anticipated.

“Inflation is cooling off, but we aren’t through the woods yet,” commented Mabrouk Chetouane, Natixis head of global market strategy, solutions.

“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,” he said.

Geopolitics (72 per cent) was considered the top potential headwind for 2023. Although, a quarter of strategists did not think that geopolitics would impact markets in the second half of the year, instead reducing geopolitical issues to “noise”.

Corporate earnings were also a potential headwind for the majority of respondents, however, 25 per cent were optimistic and said earnings may act as a catalyst for market growth in the second half of the year.

Meanwhile, strategists were split on the outlook for consumer spending, with half worried that a slowdown in spending will serve as a headwind, while 28 per cent believed consumer spending would increase, providing a catalyst for market growth.

When asked about the global distribution of these headwinds and the best positioned regions for opportunities, 34 per cent of respondents said the US is best positioned for the rest of the year, while 22 per cent countered that either Japan or emerging markets will be the winner.

Meanwhile, just 16 per cent thought that Europe would lead the market, 6 per cent believed it would be China, and none backed the UK.

Big tech ignites equity rally

Markets rallied in the first half of the year, which Natixis attributed to the re-emergence of tech.

H1 2023 saw returns of 30 per cent on the NASDAQ, the best in the index’s history, alongside the S&P 500 gaining 15.91 per cent.

Even so, no respondents from the survey expect the tech rally to intensify in the second half of the year, less than a third (31 per cent) expect it to “continue steadily”, and 6 per cent of strategists think that the “bubble will burst”.

Looking at artificial intelligence (AI), 88 per cent believe it would unlock previously undetectable investment opportunities and 69 per cent said it could accelerate day trading.

Notably, all strategists surveyed believed AI would increase potentially fraudulent behaviour.

“Compared to expectations at the end of 2022, 2023 has been surprisingly positive so far, but investors need to stay alert to ongoing headwinds to prevent complacency,” Mr Chetouane explained.

“Inflation has gone from an all-consuming concern to a manageable situation in most developed markets, but it could take some time before aggressive targets set by central banks are met.

“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,” he concluded.

Looming tailwinds could shake up soft landing relief

While a robust start to the year has many strategists agreeing that the risk of a recession is reduced, an investment manager warns that the market needs to remain alert.

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