By Mike Dolan
LONDON, March 20 (Reuters) – The world economy, despite its turbulent journey, seems to have settled into a post-pandemic growth equilibrium, ushering investors along for the ride. The prolonged debate surrounding ‘recession or soft landing?’ has transitioned into a narrative of a ‘no landing’ global scenario – a notion that would have instilled fear just a year ago with its potential interest rate ramifications, but one that investors are now keenly embracing.
The latest Bank of America survey of global asset managers underlined this shift in sentiment.
While the concept of a ‘soft landing’ remains the predominant outlook for the world economy, involving a moderation in growth rates leading to a decline in inflation and subsequent easing of interest rates, a growing faction of almost a quarter of BofA survey participants now leans towards a ‘no landing’ scenario over the next year – a significant surge from last month’s 19% and nearly quadruple the figure reported at the close of last year.
Should we be alarmed?
Well, a ‘no landing’ trajectory essentially envisions sustained or even accelerated growth momentum, a slight inflation overshoot, and the maintenance of restrictive interest rates with potential marginal reductions. It’s a ‘higher for longer’ stance, reflecting the current market environment that has persisted throughout the year.
Into the Unknown: Embracing Growth Without Landing
Dissenting voices caution that a ‘no landing’ outcome could sow the seeds for future economic woes – triggering debt distress, escalating defaults, rising unemployment, and a slowdown in consumer spending down the line.
However, the market sentiment tells a different story.
With stock markets witnessing substantial gains of 5-10% amidst a 0.5% uptick in 10-year U.S. and European bond yields, the BofA survey indicates a lack of apprehension towards this emerging ‘no landing’ narrative.
As the survey reveals diminished expectations of bond yield declines over the next year – dropping to 40% from 62% late last year – it also highlights elevated optimism regarding corporate earnings and stock allocations hitting 2-year peaks. There’s been a notable shift towards European and emerging market assets as well.
Optimism Prevails in Asset Management
Esteemed figures in the asset management realm echo this optimism.
Willem Sels, Global Chief Investment Officer at HSBC Global Private Banking and Wealth, exemplifies this sentiment by indicating a complete absence of cash in tactical asset allocations and a substantial overweighting on global equities and bonds.
“Despite existing risks in our intricate world, markets seem comfortable managing uncertainties as long as the fundamentals of earnings and interest rates remain positive,” Sels remarked.
Although risks loom on the horizon, including heightened geopolitical tensions, disruptions in trade flows due to political constraints, impending elections, concerns of tech and AI stock bubbles, persistent inflation, and unyielding interest rates, these factors have not derailed the growth trajectory or investors’ confidence globally.
Despite a trying period in China marked by a property market downturn and political tensions, the country’s industrial output is showing signs of resurgence in the current year, underscoring market resilience and investor adaptability.
Even the Bank of Japan’s shift from a long-standing negative interest rate policy failed to trigger the anticipated significant market upheaval, exemplified by the Nikkei stock index’s rise post that decision, largely propelled by a weaker yen.
As concerns persist regarding unforeseen events and asset valuation, the global growth outlook has continued to improve at the dawn of this year.
In harmony with this positive trend, international organizations such as the International Monetary Fund have revised their global growth projections upwards for the current year.
Although still slightly below the century average, the IMF raised its global growth forecast to 3.1% for this year, an increase of two-tenths of a point from October, with expectations of a further uptick to 3.2% in 2025. The outlook extends through 2028, projecting sustained annual global growth exceeding 3%, translating to a nominal global output of around $134 trillion in three years – more than double the average of the years from 2005 to 2014.
Can central banks afford to maintain a status quo, tweaking interest rates incrementally while allowing the tighter credit conditions in the market to moderate inflation and sustain growth?
The resurgence of ‘real’ inflation-adjusted long-term borrowing rates from the tumultuous fluctuations witnessed during the pandemic indicates a return to pre-crisis levels of around 1% – aligning closely with the 25-year historical average measured through global debt indexes and inflation.
By excluding the aberrational decline in real rates post-COVID, the average real borrowing rate for the first two decades of the new century settles around 1.5%, underscoring the relatively relaxed financial environment that could keep the economic machinery running smoothly.
The author’s perspectives reflect a column for Reuters.
Bank of America’s funds survey chart on ‘no landing’ https://tmsnrt.rs/48WGhI4
IMF world growth estimates and forecasts https://tmsnrt.rs/3PozkbW
World economy surprises in ’24 https://tmsnrt.rs/4a49MsL
Stocks and bonds go separate ways in ’24 https://tmsnrt.rs/43mf7sV
Real borrowing rates rebound to averages https://tmsnrt.rs/43mez6l
(Editing by Alexander Smith)
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