11 January 2019

Premature recession fears

4 min read

Trevor Greetham
Trevor Greetham

Head of Multi-Asset at Royal London


Read the latest thoughts from Trevor Greetham, head of multi asset, Royal London Asset Management, in the latest Investment Clock Strategy report. An upturn in volatility remains apparent as Wall Street experienced one of its worst December’s since the Great Depression. Recession fears continue to rise and markets are pricing in this eventuality, but current sentiment readings are extremely depressed, the oil price is down and China continues to add stimulus. Trevor notes that he is starting 2019 constructive on stocks. Brexit remains a source of great uncertainty, for which he believes in hedging risk rather than predicting an outcome.



In our last report, “A Pivotal October”, we predicted an upturn in volatility. The Investment Clock was in Stagflation and geopolitical risk was rising. We went into the initial selloff neutrally positioned in our multi asset funds and bought at the lows. We think the further leg down in December was linked to threatened year end tariff increases. Recession risks are rising but sentiment is depressed, the oil price is down and China is adding stimulus. We start 2019 constructive on stocks but expect to get more cautious as the year progresses. Brexit remains a source of great uncertainty. Here we are hedging risks rather than positioning for a specific outcome.

The Christmas Crash

We expected stock markets to weaken in October but Wall Street went on to suffer its worst December since the Great Depression. We put this down to a sudden and possibly temporary weakening in US and global growth linked to the threatened imposition of 25% tariffs on China at year end. Thin holiday markets also had to contend with erratic White House announcements and a delay in the Brexit vote.

Near-term recession risks overdone

We are late in the business cycle and volatility is likely to remain high but we think markets are premature to be pricing in a US recession. The US labour market remains strong, fiscal policy is loose and the US Federal Reserve (Fed) is close to pausing its rate hikes. Housing weakness is a concern but a sharply lower oil price should boost US consumer spending in 2019. Meanwhile China is easing policy again, in part to offset a tariff increase that has been suspended and may never come into force.

Positive on equities but expecting to get more cautious

With investor sentiment extremely depressed (see focus chart) we start the year constructive on stocks. We expect to become more cautious as the year progresses. There isn’t much spare capacity in the US economy and a sharp recovery in China could lead to Fed over-tightening, raising the risk of a full blown recession in 2020.

How to prepare portfolios for Brexit

The Brexit situation remains deeply uncertain. There are many possible outcomes ranging from a No Deal exit to a referendum on the final deal that could see the UK remain in the EU on current terms. Sterling could go either way. Investors may try to hedge risks by investing across assets that will perform well in a range of different scenarios rather than positioning for any particular development.

Focus chart

Investor sentiment is extremely depressed with our composite indicator registering two of its most extreme negative readings ever in Q4 2018. We think markets are premature to price in a US recession and we start the year constructive on equities.

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About Royal London Asset Management (RLAM):

Established in 1988, Royal London Asset Management (RLAM) is one of the UK's leading fund management companies, providing investment management solutions to both wholesale and institutional clients such as not-for-profit organisations, local authorities and the insurance sector.

RLAM manages £114 billion of assets and employs 92 investment professionals as at December 2018. It invests in all major asset classes including UK and overseas equities, government bonds, investment grade and high yield corporate bonds, property and cash.

For professional clients only, not suitable for retail investors.

Issued February 2019 by Royal London Asset Management Limited, registered in England and Wales number 2244297; authorised and regulated by the Financial Conduct Authority. Registered Office: 55 Gracechurch Street, London, EC3V 0RL.

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