Astute Investors sharply divided on likelihood of a triggered global recession
Most investors are expecting central banks across Asia to be dovish and cut interest rates, just as the US Federal Reserve did on July 31
27 Aug 2019 | Aaron Leung
The region’s top bond investors are split on whether global headwinds will trigger a global recession. While 53% of Astute Investors taking part in a recent survey, conducted by Asset Benchmark Research (ABR) in June, expect a recession, 47% do not. However, those who expect a recession see it looming close. Just under half (43%) predict it will strike in the next 12 months while 53% forecast it to happen within two years.
While a year ago, Federal Reserve interest rate increases were one of the main concerns among bond investors, this is no longer the case. The survey showed that only 5% of the Astute Investors ranked Fed rate hikes as the number one risk in the coming twelve months. Investors generally expect rate decreases.
In fact, on July 31 investor sentiments were borne out when the Federal Reserve cut interest rates by 25 basis points for the first time in more than a decade with chairman Jerome Powell saying that the cut was “intended to ensure against downside risks from weak global growth and trade tensions.”
Although the fear of Fed rate hikes has faded, a global slowdown has become more likely, partly due to the US-China trade war and the economic slowdown in China.
The US-China trade war has been predictably uncertain since it started a year ago. Despite the exemption of 110 Chinese products from 25% tariffs on July 9, President Trump, within a week, again threatened to impose tariffs on US$325 billion of Chinese goods on July 16. On August 1, President Trump said he would impose 10% tariffs on US$300 billion of Chinese goods, which are set to take effect on September 1.
Indeed, almost half of the respondents (49%) cited the US-China trade war as the most urgent concern in the coming 12 months, suggesting that it will take more than a year for the two nations to come to any kind of meaningful agreement on the issue.
According to data released by China’s National Bureau of Statistics in July, the world’s second-largest economy slowed to 6.2% in the second quarter from 6.7% a year ago. Likewise, the IMF trimmed its forecasts for global economic growth to 3.2% in July, down from 3.3% in April, citing adverse developments including further US-China tariffs as one of the major risk factors contributing to the sluggishness of growth.
One of the possible explanations is that investors are increasingly expecting dovish central bank policies.
“A flat or lower growth in GDP is already priced into the market. The next important question is how the central bank will act. The hawkish monetary policy will deteriorate the matured-growth US economy, so I do not expect the Fed to hike rates anymore. I expect a rate cut of about 50-75bp within Q1/2020,” says Surasi Chongchaiyo, director of investment at National Saving Fund in Thailand.
Indeed, three out of four investors are expecting central banks to cut interest rates further in the coming 12 months.
However, with Fed rates lower than the pre-2008 financial crisis level, the remaining question is apart from lowering interest rates, what can central banks do to smoothen the next global recession?
The survey, in which 302 investors shared their views, was conducted between June 3 and June 28.
The survey on market outlook is part of the Asian Currency Bond Benchmark. It covers 10 markets: China (onshore, offshore), Hong Kong, India, Indonesia, Malaysia, the Philippines, Singapore, Taiwan, and Thailand. We have conducted it annually since 2000. We provide data on the product needs of investors and the market penetration of banks active in local currency bonds. The survey analyzes investor buying behaviour when selecting counterparties, giving unprecedented access into the minds of investors.
Note: 302 investors responded to the survey including this year’s most Astute Investors, who are ranked based on their knowledge of issuers and markets, trading skill plus acumen in making investment decisions.