Recession or Soft Landing? Top executives' opinions diverge on the impact of the pandemic

In stark contrast to the consensus a year ago that the United States would enter a recession and cut interest rates rapidly but failed to materialize, there is now a lack of consensus among these forecasters. In the third quarter of this year, the world's largest economy, the United States, grew by 5.2%.

According to Zhitong App, investment banks and asset management companies have made completely different predictions about the stock market and currency trends in 2024, reflecting deep divisions over whether the US economy will enter a recession and drag the global economy into a quagmire. This year's divergence has resulted in a scatter plot of predictions on the US interest rate path and how global assets will perform under the influence of the Federal Reserve's actions.

Figure 1

As a result, market participants are preparing for possible volatility at the beginning of the new year, despite strong rebounds in the stock market and bonds last month based on short-term consensus - inflation and interest rates firmly declining.

Sonia Lauder, Chief Investment Officer of French Societe Generale Asset Management, said, "Whether the United States will experience a hard landing or a soft landing will dominate the market, but the current narrative is still unclear, and if there are significant changes in the current interest rate forecast, it will cause significant volatility."

Option trading data shows that investors are increasingly concerned about protecting their portfolios from the impact of future stock market volatility.

Amundi, Europe's largest asset management company, now expects the United States to enter a recession in the first half of 2024, which means the group is bearish on the US dollar and bullish on emerging market assets.

In terms of foreign exchange, Vincent Mortier, Chief Investment Officer of Amundi, said that as the Bank of Japan is expected to eventually abandon its ultra-loose monetary policy, the yen will become a "bright spot" in the market.

However, Morgan Stanley does not believe there will be a recession and believes that the Federal Reserve may keep interest rates at a higher level until next year. The bank predicts that the US dollar index will rise from the current 104 points to 111 points, the euro-dollar exchange rate will fall to 1, and the yen-dollar exchange rate will only moderately rebound to 142.

Figure 2

Stock market, rise or fall?

For the US stock market that drives global stock markets, market forecasters are divided into two camps, which Citigroup's head of trading strategy, Stuart Kaiser, calls "converts and followers" of last year's strong recession consensus. Kaiser said, "Some bears (still) remain very firm, believing that if it doesn't happen this year, it will definitely happen next year."In this regard, Deutsche Bank predicts a slight recession in the United States in the first half of 2024, with a 175 basis point interest rate cut. The reduced borrowing costs will drive the S&P 500 index to rise to 5100 points. It is understood that the S&P 500 index has risen by 19% this year, reaching 4567 points.

In addition, JPMorgan believes that a recession is possible and expects the S&P 500 index to close at 4200 points by the end of the year, while Goldman Sachs believes that the risk of a recession is limited.

BlackRock Investment Institute stated that the current analyst estimates for S&P 500 index earnings are the most dispersed since the outbreak of the COVID-19 pandemic.

Amundi Asset Management, which manages approximately $1.5 trillion in assets, stated that it holds a lower proportion in the stock market and expects an economic recession in the United States.

Meanwhile, some investors have moved beyond the debate about the US economy and are seeking other opportunities.

Luca Paolini, Chief Strategist at Pictet Asset Management, stated that their major judgment is that European stock markets will generate returns, as they believe that these markets are undervalued.

Bonds are back

Most economists believe that the surge in global inflation has come to an end. However, this does not mean that there is a consensus among investors on whether this will lead to a significant interest rate cut (which usually pushes up bond prices as yields decline).

Figure 3

Bond giant PIMCO believes that there is a 50% chance of a recession in the United States in 2024 and recommends investing in government bonds instead of stocks.

HSBC's fixed income strategist predicts that the yield on US 10-year Treasury bonds will drop from the current level of around 4.3% to 3% by the end of 2024.

However, Adrian Gray, Global Chief Investment Officer at Insight Investment Management, said, "The government bond market has become too active. We see the Federal Reserve, the European Central Bank, and the Bank of England cutting interest rates starting from the third quarter of next year, and now the pricing in the government bond market has exceeded this expectation, so we expect yields to rise slightly from current levels."