Hard economic landing or soft?
Recession or not?
Second-half rally for stocks or more pain to come?
There are many questions to be answered in the coming months.
BCA Research is taking its best stab at how the economy and financial markets will unfold over that time with their third quarter strategy outlook.
We’ve culled the salient hi-lights and a few charts from what is an insightful, informative, and exhaustive report by Chief Global Strategist Peter Berezin, and his team.
Macroeconomic Outlook: The odds of a global recession have risen.
We now assign 40% odds to a US recession over the next 12 months.
However, if a recession does occur, it is likely to be a very mild one, reflecting strong underlying economic fundamentals.
Equities: The odds of a recession have increased, but equities now adequately discount that risk.
The S&P 500 is currently down 21.1% in nominal terms and 24.4% in real terms from its peak in early January.
Overseas bourses have fallen by a similar amount.
We assign 60% odds to a “no-recession” (i.e., soft landing) scenario for the US over the next 12 months, 30% odds to a mild recession, and only 10% odds to a deep recession.
Global earnings estimates will come down, but not as rapidly as most investors expect.
Favour non-US stock markets.
Chinese stocks will continue to outperform.
Fixed Income: While global bond yields still have scope to rise over the long term, they will dip over the next 12 months as inflation declines.
Corporate debt will outperform high-quality government bonds.
Currencies: The US dollar, which is now almost as overvalued as it was 1985, is set to weaken.
The yen will be the surprise winner during the remainder of the year.
Commodities: Tight supply will support commodity prices in the near term, but the longer-term outlook is bleak.
Gold: The Fed’s hawkish pivot has significantly reduced the odds of a sustained inflation overshoot.
This reduces the attractiveness of owning gold.
That said, a weaker dollar has historically been good news for gold prices.
A shift in investor demand from cryptos – which many investors bought for their alleged “anti-fiat” qualities – could also benefit gold.
For now, we recommend a neutral allocation to gold.
Bottom Line: With global equities down 24% in real terms from their peak earlier this year, a lot of bad news has already been priced in.
A modest overweight on stocks, a neutral position on bonds, and an underweight on cash is appropriate.
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