With fears rising over a potential US recession and after a falling stock market led to a big tech sell off, Mark Haefele, chief investment officer at UBS Global Wealth Management, discusses the macroeconomic outlook and potential investment opportunities.

Stocks fell yesterday and the selling continued through Asian and European time. For all that, UBS thinks that fears of a recession are premature. 

The S&P 500 fell 1.4 per cent on Thursday and the yield on the 10-year US Treasury fell below 4 per cent for the first time since February, as soft US data revived fears that economic growth could weaken too abruptly. The ISM manufacturing survey showed activity contracting by the most in eight months. Initial claims for unemployment benefits, meanwhile, climbed to the highest level in almost a year. 

The risk-off turn in markets comes after a 1.6 per cent rise in the S&P 500 on Wednesday, on renewed enthusiasm among investors about the outlook for artificial intelligence (AI) following more news of rising capital spending from top tech firms. The rally was given further impetus by indications from the US Federal Reserve that policymakers have become more confident that the threat from inflation has passed and that a rate cut could be justified at its next meeting in September.

However, market moves on Thursday pointed to investor concerns that the US economy is cooling too quickly and may require further support from the Fed. Fed funds futures indicate that three 25-basis-point cuts are now fully priced in for 2024 – up from just two at the end of last week. Amazon’s projected profit also missed analyst estimates whilst the tech heavy Nasdaq futures were down 1.3 per cent during Asia trading hours on Friday morning after a 2.3 per cent decline on Thursday.

Japanese equities also slid further on Friday morning, with the Nikkei 225 falling 4.9 per cent and the broader TOPIX gauge losing 4.7 per cent. This came after Thursday’s declines of 2.5 per cent and 3.2 per cent, respectively, following a sharp rally in Japanese yen in response to the Bank of Japan’s rate hike earlier this week. The regional MSCI Asia Pacific Index also dropped by 3.4 per cent. These declines mirrored the earlier losses in the US, where the S&P 500 and Nasdaq 100 saw substantial dips. 

US recession?
Mark Haefele, chief investment officer at UBS Global Wealth Management, believes that the US recession fears are premature. “The disappointing ISM manufacturing survey data was at odds with the recent strength of industrial production, which rose 0.6 per cent month-over-month in June. The recent GDP release showed the US economy growing by 2.8 per cent year-on-year in the second quarter, above trend,” he said in a note.

Haefele believes that the recent data support his view that the US economy is headed for a soft landing rather than a contraction. In his view, this justifies two 25-basis-point rate cuts this year, rather than the three that the market is now pricing. Haefele wants to see more concrete signs of weakness before shifting his view.

He thinks that a return to higher levels of volatility was to be expected, especially as the Fed approaches the start of a cutting cycle and as investors await guidance from top tech firms on whether their heavy investments in AI are paying off. Meanwhile, political uncertainty remains elevated, especially ahead of the US presidential election in November.

Investment opportunities
Haefele suggests that investors brace for renewed volatility but avoid overreacting to short-term shifts in market sentiment. He recommends that investors seek quality growth firms, position for lower rates and diversify with alternatives. He believes return prospects for private credit remain attractive. He also thinks that the market potential of AI is vast, and expects it to be a key driver of equity market returns over the coming years.

Meanwhile, Dan Hurdley, managing director at ARC Research, highlighted this week how global small cap equities fared better with a return of 6.9 per cent for the month compared with large cap equities of 1.3 per cent, after US tech giants suffered a major setback in July. “More cautious investors benefitted from rising bond prices as the inflation pulse continues to subside. Listed property and infrastructure were also beneficiaries from the increasing confidence in future interest rate cuts,” Hurdley said.