Recession fears may be fading but global economy isn't out of the woods yet

A potential China slowdown, trade wars and the destabilization in eurozone are still seen as potential risks to the global economy.

Mumbai: Global fund managers are shrugging off fears of a recession. The latest Bank of America Merrill Lynch (BofA ML) survey showed 86% of money managers do not believe that the inversion of the US Treasury yield curve signals an impending recession. While this is positive, it offers little respite as far as investor sentiment goes. That is simply because the global economy is unlikely to miraculously recover either.

"There is no doubting a global slowdown. Market movements will hinge on the magnitude of slowdown and policy framework meted out to address the same," said Suvodeep Rakshit, senior economist at Kotak Institutional Equities.

As things stand, risks to global economic growth are aplenty. A potential slowdown in China, trade wars, destabilization in the euro area, central bank liquidity traps and an unexpected rise in inflation were pointed out as the top five risks by asset managers in an Institute of International Finance (IIF) survey. Most asset managers find the current global macroeconomic and investment environment to be slightly less supportive now than a year ago.

No wonder then we could be staring at a phase of "low-growth, low-inflation" over the next 12 months, as pointed out by the BofA ML survey.

Striking a note of caution, global fund managers said that they are positioned for "secular stagnation".

This bearishness isn't surprising considering the deteriorating economic indicators across the world. For instance, the latest Purchasing Managers' Index (PMI) readings for developed economies present a disappointing picture. The US composite PMI dropped sharply from 54.6 to a 31-month low of 52.8 in April, indicating the American economy is fast losing momentum. What's more, the new export orders components of manufacturing PMIs remain very weak. Clearly, this does not bode well for global trade.

Of course, global central banks are expected to come to the rescue in the event of a major downturn. Over 95% of participants in the IIF survey expect global policymakers to respond to the next economic downturn with more monetary stimulus, while some 75% of participants foresee further fiscal stimulus.

Despite the odds, global equities are drawing comfort from renewed optimism around the US-China trade deal. The MSCI World Index and MSCI Asia (ex-Japan) Index have risen by around 15% so far this year. These indices are trading at a one-year forward price-to-earnings multiples of around 12-15 times.

But sentiment may turn sour if the deal fails again. Also, an economic slowdown will become difficult to ignore for equity markets as it starts reflecting in global corporate earnings, hurting overall returns.

Fabrizio