(Bloomberg) – Investors are looking beyond a looming global recession to see one country – and its financial markets – on the other side most prominent.
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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 believe there’s almost a bet on whether the UK economy or the euro-zone will fall first into a slump.
Around 47% of the 452 respondents expect the UK to win this unwelcome prize, possibly reflecting greater risks to financial stability in that country, compared to 45% who said Europe. Only 7% saw that the US was the first economy to collapse. And both an American recovery and a prolonged European downturn will pose different risks to wealth and income inequality.
The transatlantic divide reflects the war in Ukraine and the energy crisis increasing long-term economic pressures across Europe that are less prevalent in the US. Despite this, investors have hinted that the Federal Reserve is just as likely as the European Central Bank or the Bank of England to halt its rate-hike cycle first.
In addition, the survey also shows that any downturn could become a long drudgery for Europe and the UK – while an overwhelming majority of investors, a full 69%, say the US will weather the storm best and emerge as the relative winner among them major economies from this year’s series of crises.
The survey highlights the clear implications for asset allocation. About 86% of investors expect US markets to recover first, with respondents slightly favoring equities over bonds.
This result suggests that the longstanding premium for US equities will remain in place – and that investors are poised to flock back to US Treasury markets as the peak of hawkish stance begins to emerge.
There are at least three possible reasons that could explain why so many investors think the US is likely to halt rate hikes first – to allow the economy and asset markets to recover – when recession risks are much more severe elsewhere.
The first are concerns about global financial stability. Given the dollar’s status as the world’s main reserve currency, the US may be reluctant to continue raising interest rates even if its main currency home is outside the US as global turmoil mounts.
A second idea to consider is that the Fed started aggressively jumbo rate hikes first, suggesting its work might as well get done first. This is supported by the survey data as the majority of investors see the US as the most likely place to stop inflation.
And a third major reason to think the Fed might quit first is simply because they said so. The US Federal Reserve has indicated its desire to frontload rate hikes so that they can remain at restrictive levels for a significant period beginning early next year. Neither the Bank of England nor the ECB were so explicit in their forward guidance.
The survey revealed some interesting differences between retail and professional investors. For example, US equities have been more favored by retailers than US bonds, suggesting that the recent bear market in equities has not permanently broken the buy-the-dip mentality. Retail investors were also more likely to say the UK would go into recession first.
One constraint to think about: inequality. The (unspoken) downside risk for the US if the survey results come through could be a widening of income and wealth inequality.
The Fed’s rate hikes have hit rate-sensitive sectors like housing hardest. Some potential first-time owners have already been forced to give up building wealth by buying and renting instead.
And the central bank’s explicit goal is to cool down the economy by weakening the labor market. If this happens while US financial markets are about to recover first, it could widen wealth disparities. Rising financial assets – which are disproportionately owned by wealthier households – would be offset by stagnant labor income from wages and renters trapped by rising interest rates.
Europe and the UK are unlikely to escape rising inequality. As the wealth of almost everyone collapses in a slump, the least wealthy tend to lose the most. And inflationary recessions are the worst of both worlds, because inflation is a de facto regressive tax – hitting the poorest, who spend most of their disposable income.
Respondents are much more pessimistic that the UK and the eurozone can get the cost of living under control, with just 11% and 16% respectively expecting the BOE or ECB to successfully contain inflation in 2023, versus 65% in September UNITED STATES.
In Britain, the so-called bruised middle could be in for a particularly hot period if the 73% of pollsters who believe the country will face a housing crisis next year are correct. Real estate is a powerful contributor to wealth effects, and declining real estate prices tend to prevent it from trickling through to the rest of the economy. The result could be worsening inequality, even if the middle-income group sees asset prices fall.
In the end, however, the survey is reminiscent of Warren Buffett’s dictum: “I’ll tell you how to get rich. Close the doors. Be fearful when others are greedy. Be greedy when others are afraid.”
For those looking to benefit from the outperformance of the US economy and asset markets, the time is not yet now that the shore is clear and the way is clear. It’s when the climax of hawkishness and fear pierces.
So one reading of the entire survey results is that at some point — much sooner than in the UK or Europe — it will make sense to buy the dip in the US, even if that’s not quite now.
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(Updates with TV clips under paragraphs 11 and 16.)
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