A recession in the next five years is inevitable and will result in many assets generating returns below historical returns, according to a long-range economic and market forecast by fund manager Robeco.
The firm has published a five-year outlook, Escaping the Hall of Mirrors, in which it says it expects a recession around 2022.
“The rot is in the pervasive policy uncertainty that is now at the highest level in decades,” says the report’ author, Robeco head of investment solutions Bart Oldenkamp.
“Monetary authorities can’t change consumer risk aversion in an environment of skyrocketing political uncertainty,” the report says.
In Robeco’s view, business cycle expansion peaked in 2018, with economic growth now decelerating. Reliable recession warning signs, such as an inverted yield curve, have already flashed red.
“With nominal policy rates close to or at the effective lower bound, our view is that central banks in advanced economies are ill-equipped to counter a recession.
“We expect fiscal policy to step in, with low interest rates offering an opportunity. Fiscal response is our base case. Stimulus increases demand and the recession is mild.”
Alternately, in Robeco’s bull case scenario, trade issues are resolved and increased international cooperation makes fiscal stimulus effective.
In the bear case, the global world order crumbles and the United States leaves the World Trade Organisation. In the US-China battle for global hegemony, other countries are caught in the crossfire and the decades-long process of globalisation goes into reverse.
Working on the base case scenario, developed market equities will rise 4.5 per cent a year over the five years to 2024 and emerging market equities will rise 5 per cent a year.
This is well below recent returns. The MSCI World Index was up 8.6 per cent a year over the past five years.
“We have revised downwards our return forecasts for most asset classes, with most indicators pointing to very expensive asset classes,” the report says
Equity valuations suggest that in a low-rate environment investors have been willing to pay a premium for future earnings, fearing that they will be under-compensated in less risky investments like bonds.
“Over time, elevated valuations mean revert by lower prices, not by the materialisation of higher earnings.
There is one bright spot in terms of relative value – commodities.
“We find that commodity returns are to a large extent determined by what happens to the China story in the next five years, as it is the world’s largest commodity user.
We think Chinese authorities will adopt a dovish tilt to their policies, preferring to maintain economic traction above pursuing deleveraging by further restraining broad money growth. This should benefit commodity prices.