(Bloomberg) — Investors are looking beyond a looming global recession and seeing one country – and its financial markets – emerging stronger over the other.
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US stocks and bonds will lead the way out of the current wave of market turmoil, according to participants in the latest MLIV Pulse survey. Meanwhile, they think it’s close to an equal bet on whether the UK or the eurozone economy will fall into recession first.
Some 47% of 452 respondents expect the UK to win this unwelcome award, possibly reflecting greater risks to that country’s financial stability, compared to 45% who said Europe. Only 7% saw the US becoming the first economy to crack. The US recovery and the prolonged European downturn will present different sets of risks in terms of wealth and income inequality.
The transatlantic divide reflects the war in Ukraine and an energy crisis that adds long-term economic pressures across Europe that are less prevalent in the United States. However, investors have indicated that the Fed has a similar probability of stopping the European Central Bank or the Bank of England’s rate-raising cycle first.
What’s more, the survey also suggests that any pullback could end up being a long daunting one for Europe and the UK – while the vast majority of investors, a full 69%, say the US will weather the storm better and emerge as the winner. Relative among the major economies of successive crises this year.
The survey highlights the obvious implications of asset allocation. About 86% of investors expect US markets to recover first, with respondents slightly favoring stocks over bonds.
This result suggests that the long-term premium for US stocks will remain in place – and that as the peak of tightening appears, investors are ready to return to US Treasury markets in droves.
US stock futures advanced early Monday while Treasury yields fell after British Treasury Secretary Jeremy Hunt said he would abandon tax plans that investors deemed harmful to the economy.
There are at least three potential reasons why many investors see the US as likely to halt rate hikes first – allowing the economy and asset markets to recover – even though recession risks are much more severe elsewhere.
The first is global financial stability concerns. Given the dollar’s status as the world’s major reserve currency, the United States may not want to continue raising interest rates in the face of escalating global turmoil, even if its primary location is outside the United States.
The second thought to bear in mind is that the Fed started raising huge interest rates first, suggesting that it may be doing its job first as well. This is backed by survey data, with the majority of investors seeing the US as the most likely to suppress inflation.
The third important reason to believe the Fed might stop first is simply because it said so. The US central bank has telegraphed its desire to raise front rates so that it can hold out for a long time, at a restricted level, starting early next year. Neither the Bank of England nor the European Central Bank was clear on their future guidance.
The survey found some interesting divisions between individual investors and professional investors. For example, US stocks have been favored by retail more than US bonds, indicating that the buy-on-low mentality has not been permanently broken by the recent bear market in stocks. Individual investors were also more likely to push the UK into recession first.
One caveat to think about: inequality. The (unstated) downside risk to the United States if the survey results materialize would be widening income and wealth gaps.
The interest rate hike by the Federal Reserve has affected interest rate sensitive sectors such as housing even more. Some potential first-time homeowners have already had to forgo building wealth by buying and renting instead.
The central bank’s clear goal is to calm the economy by easing the labor market. If that happens, while US financial markets are the first to recover, it could inflate wealth differentials. The recovery of financial assets – owned disproportionately by wealthier families – will be accompanied by stagnating wage income, and tenants trapped by rising prices.
It is unlikely that Europe and the UK will escape rising inequality. While nearly everyone’s wealth declines in a recession, the less wealthy tend to lose the greatest. And stagflation is the worst of both worlds, because inflation is a de facto regressive tax – hitting the poorest people who spend the greater part of their disposable income.
Survey respondents are more pessimistic that the UK and the eurozone can control the cost of living, with only 11% and 16% respectively expecting the Bank of England or the European Central Bank to succeed in curbing inflation in 2023, versus 65% in the US.
In the UK, the so-called pressured middle could be in a particularly stressful time, if the 73% of respondents who think the country will face a housing collapse next year are right. Housing is a powerful driver of wealth effects, and falling home prices tend to impede any outflow to the rest of the economy. The result can exacerbate inequality even when the middle income group sees a decline in asset prices.
But in the end, the study remembers Warren Buffett’s quote: “I’ll tell you how to get rich. Close the doors. Be afraid when others are greedy. When others are greedy, they are afraid.”
For those looking to take advantage of the outperformance in the US economy and the asset market, the time to do so is not yet when the coast is clear and the path is clear. It is when the height of hawks and fear reigns.
So one reading of the overall survey results is this: At some point – much sooner than in the UK or Europe – buying dips in the US will make sense, even if the time isn’t right now.
To subscribe to MLIV Pulse Stories, click here. For more market analysis, check out the MLIV blog. The full survey results can be found here.
(Updates as markets react on Monday.)
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