There is a risk of a recession in the US within the next 12 months, according to 40% of members at the Investment Strategists Association of Geneva (Isag).
This view is held by CIOs, chief economists and chief strategists from Geneva’s leading banks and asset managers, who gather at the Isag meetings on a monthly basis.
Donald Trump’s measures are likely to shorten the US economic cycle, explained Emmanuel Ferry, CIO at Banque Paris Bertrand Sturdza.
Trump’s proposed fiscal stimulus measures will take place against a backdrop of full employment, which will limit the impact on economic growth and inflation.
Speaking on behalf of the Isag group, Ferry said: ‘Instead of lengthening the cycle, the Trump measures would have the opposite effect. The Fed could then come into conflict with the fiscal stimulus policy.’
Similarly, an appreciation in the dollar would weaken the US, creating cyclical downturn and a reversal of the improvement in profitability.
In turn, this would spell trouble for emerging markets, by increasing their vulnerability.
Isag’s three predictions:
· Valuations of financial assets are stretched in all asset classes
· Monetary policy divergences will continue
· The economic cycle is ‘relatively mature’
Isag member’s asset allocation views:
· Equity – 42%
· Credit bias – 24%
· Alternative investments - 12%
· Cash – 6%
· Raw materials 4%
· Sovereign bonds limited at 12%
Betting on bonds
Although state bonds are capped at 12%, many CIOs admit they are ready to retake exposure to US rates after 2016’s correction.
‘This opportunistic increase in the duration would be at the expense of bonds of companies and shares, which could lose their bullish momentum quickly in the case of disappointing profits and growth,’ Ferry said.
Even so, members appeared wary of German rates, which could grow tight if the ECB were to announce a tapering for 2018 in the middle of the year.
Overall, US Treasuries are favoured over the German bund, particularly after the yield spread in December hit its highest level since 1989.
Talking regional allocations, overall sentiment shows a shifting preference towards Europe and Japan on the shares side.
Caution still reigns for emerging markets due to the strong dollar and the upcoming political transition in China.