Quarterly Outlook: Between resilience and fragility
Hopes of a soft landing have all but vanished. Andrew McCaffrey, Global CIO, Fidelity International, believes a recession is coming, but perhaps not for some time. For now, we oscillate between resilience and fragility.
Originally published on June 23, 2023 by Fidelity International
Written by Andrew McCaffery, Global CIO, Asset Management, Fidelity International
- Resilience now, fragility later
- The long game in China
- Corporate sentiment stabilizing
For the previous two quarters, my colleagues and I have been trying to navigate our way through the “polycrisis” – a confluence of pressures which we believe could force central banks into overtightening and trigger sharp recessions. That polycrisis has now left markets oscillating between resilience and fragility: abundant liquidity and robust labour markets on the one hand, and the lagged effects of policy and tightening lending standards on the other.
Resilience now, fragility later
The “best-flagged recession in history” still isn’t upon us. Excess savings accrued during the pandemic, as well as continued tightness in labour markets, mean that financial conditions are taking longer than expected to bite. But that recession will come when the lagged effects of policies eventually take hold. Resilience now is sowing the seeds for fragility down the line.
A cyclical recession, in which unemployment in the U.S. rises to 4.4%–6.5% over the next 12 months, is the most likely outcome. A soft landing now looks beyond reach.
The long game in China
After a bumper start, China’s rebound since the end of its zero-Covid policy is underwhelming investors. Earnings estimates are on a downward path, youth unemployment is at record highs, and Chinese consumers haven’t resumed their zeal for spending.
This does not mean China’s rebound has run its course. It is perhaps no surprise that consumer confidence is muted after three years of severe restrictions. And there are positives elsewhere, including accommodative monetary and fiscal policies and an improving regulatory backdrop. Further stimulus measures may arrive soon. Meanwhile, the disjunct between the market’s expectation and the reality of the recovery has left Chinese equities trading at a significant discount.
Corporate sentiment stabilizing
Earlier in the year Fidelity International analysts had observed the mood at the companies they follow worsening, prompting us to ask whether corporate sentiment was stalling, or merely resting. An uptick in June suggests the latter, especially as a full-blown financial sector meltdown seems to have been averted.
Nevertheless, we view improving corporate management sentiment as a possible sign of complacency given the policy lags. Persistently high wage cost pressures throughout developed markets suggest that central banks are far from done, even if non-labour costs are likely to turn deflationary this quarter. The majority of Fidelity International analysts still anticipate recession over the next 12 months.
Issued by Fidelity Investments Canada ULC (“FIC”). Unless otherwise stated, all views expressed are those of Fidelity International, which acts as a subadvisor in respect of certain FIC institutional investment products or mandates.
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