Business

The time to buy dips is fast approaching – for one country


(Bloomberg) – Investors are looking beyond a looming global recession and they see a country – and its financial markets – emerging the strongest on the other side.

According to respondents to the latest MLIV Pulse survey, US stocks and bonds will lead the way out of the current wave of market turmoil. Meanwhile, they think it’s close to betting whether the UK or euro zone economies will fall into recession first.

Around 47% of 452 respondents expect the UK to win that unwelcome prize, perhaps reflecting greater financial stability risks in that country, compared with 45% say in Europe . Only 7% saw the US become the first economy to crack. And both the US recovery and the prolonged European recession will pose various risks to wealth and income inequality.

The transatlantic gap reflects the war in Ukraine and the energy crisis plus long-term economic pressures across Europe that are less common in the US. Even so, investors point out that the Federal Reserve is likely like the European Central Bank or the Bank of England to stop the rate hike cycle first.

Furthermore, the survey also indicated that any recession could become a long-winded tagline for Europe and the UK – while the majority of investors, at 69%, said that the US The United States will weather the storm the best and become the relative winner among the major economies from the series of crises this year.

The survey highlights clear implications for asset allocation. About 86% of investors expect the US market to recover first, with respondents slightly favoring stocks over bonds.

That result suggests that the long-term premium on US equities will remain – and as the peak hawks become clear, investors are poised to return to the US Treasury market. right away.

There are at least three potential reasons why so many investors think the US is likely to pause rate hikes first – allowing the economy and asset markets to recover – despite the risks. recession elsewhere is much more severe.

The first is concerns about global financial stability. Given the dollar’s status as the world’s major reserve currency, the U.S. may not want to continue raising interest rates in the face of growing global turmoil, even if its main destination is the outside world. outside the US.

The second idea to consider is that the Fed initiates aggressive rate hikes first, suggesting their work can also be done first. That is supported by survey data, as a majority of investors see the US as most likely to quell inflation.

And a third important reason to believe the Fed might stop first is simply because it said so. The U.S. central bank has telegraphed its desire to raise interest rates in advance so that it can hold for a substantial, limited time, starting early next year. Neither the Bank of England nor the ECB were so explicit in their forward guidance.

The survey reveals some interesting divides between retail and professional investors. For example, US stocks are favored by retail over US bonds, suggesting that buy-sell-bear sentiment has not been permanently broken by the recent bear market in equities. Retail investors are also more likely to expect the UK to fall into a recession first.

One thing worth thinking about: inequality. The (unspoken) risk to the US if the survey results are passed could be a widening gap in income and wealth.

The Fed’s rate hikes have hit the most rate-sensitive sectors like housing. Instead, some potential first-time homeowners have been forced to forego building wealth through buying and renting.

And the central bank’s clear goal is to cool down the economy through cooling the labor market. If that happens, while US financial markets recover for the first time, it could widen the gap between rich and poor. A rebound in financial assets – disproportionately owned by wealthy households – will be accompanied by a stagnation of wage labor income and renters trapped by the rate rate increase.

Europe and Britain are unlikely to escape growing inequality. While most people’s wealth tends to decline, the least wealthy tend to lose the most. And an inflationary recession is the worst of both worlds, because inflation is a de facto regressive tax – levied on the poorest, who spend the most of their disposable income. .

Survey respondents are much more pessimistic that the UK and the eurozone can keep the cost of living under control, with just 11% and 16% respectively expecting the BOE or the ECB to succeed in quelling it. inflation in 2023, compared with 65% in the US.

In the UK, the so-called squeezed average is likely to be in for a particularly harsh time, if 73% of survey respondents believe the country will face a housing collapse next year. exactly. Housing is a powerful driver of the wealth effect, and falling house prices tend to impede any small flows into the rest of the economy. The result could be exacerbation of inequality even as middle-income groups see asset prices fall.

Ultimately, though, the survey is reminiscent of Warren Buffett’s maxim: “I’ll tell you how to become rich. Close the door. Be fearful when others are greedy. Be greedy when others are fearful. ”

For those looking to benefit from the domination of the US economic and asset markets, the time to do so is not after the coast is clear and the path clear. That is when the hawk mentality and fear peak.

So one of the survey results overall is this: At some point – much earlier than in the UK or Europe – it makes sense to buy at a discount in the US, even if it’s not. now.

To subscribe to MLIV Pulse stories, click here. For more market analysis, check out the MLIV blog.

(Updated TV clips under paragraphs 11 and 16.)

More stories like this are available on bloomberg.com

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