Stock markets are “out of sync” with blaring recession warnings across Western economies and investors should brace for a turbulent period ahead, HSBC Asset Management warned today.
In a dire warning for the second half of the year, analysts at HSBC Asset Management said it sees “choppy markets” this year as central bankers in the UK and Europe continue to hike rates and markets begin to price in a more gloomy view of the economic conditions.
The warning comes after the Bank of England moved to lift rates to their highest level in 15 years last week as sticky inflation continues to tear through the British economy. Analysts are now betting on a six per cent base rate before the Bank begins to taper down borrowing costs next year.
“Our central scenario is for recession in western economies, and a difficult, choppy outlook for markets,” HSBC Asset Management’s chief strategist, Joseph Little, said.
“This is happening for two reasons. First, we have the rapid tightening of financial conditions that’s caused a downturn in the credit cycle. Second, markets do not appear to be pricing a particularly pessimistic view of the world.
“We think the incoming news flow over the next six months could be tough to digest for a market that’s pricing a ‘soft landing’.”
Recession warnings were “flashing red for the US and Europe”, Little added, but credit and stock markets look “out of sync” with that and continue to trade well.
“The recession is not going to be big enough to really purge all inflation pressures out of the system. As a result, this points to a regime of somewhat higher inflation and interest rates over time,” he added.
Big investors have begun to snap up bonds in the past few weeks, which slump in value in a high rate environment. Investors see value ahead of predicted rate cuts next year.
PIMCO, the world’s largest owner of government bonds, has said it sees value in UK gilts, while asset manager Hawksmoor told Reuters last week it had begun adding index-linked gilts to its funds that would “benefit if rates start coming down.”
HSBC’s Little added that interest rate exposure via government bonds was “appealing” but it was “cautious on developed market stocks”.
Equity markets have been unsettled by recent rate hikes. The FTSE 100 is down 1.3 per cent since Thursday after Threadneedle Street opted for its 13th straight rate hike.