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Portfolio > Economy & Markets

Most Pro Investors See Low Risk of Recession in 2023: Survey

By Michael S. Fischer

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What You Need to Know

  • A Natixis survey found that half of participants rated recession as a low risk in the second half of 2023.
  • Only 22% of respondents say inflation is a high risk in the second half.
  • However, nearly 40% said they do not believe inflation targets will be met until 2025.

A survey of strategy experts released Tuesday by Natixis Investment Managers finds that half of participants rate recession as a low risk in the second half. This is a big shift in sentiment from November, when 59% of institutional investors believed a recession in 2023 was inevitable.

At the same time, respondents remain cautious. Most expressed concern that inflation may hang on longer than expected, and many think rates could stay high for longer than anticipated.

After a painful run of increasing costs, central bank efforts to ease the pressure began to produce results in first half, with inflation in the U.S. shrinking from 6.5% in June 2022 to 3% by the end of June 2023.

Only 22% of strategists surveyed say inflation is a high risk in the second half, but 38% said they do not believe inflation targets will be met until 2025, and 9% said they may not be met until at least 2026.

The survey was conducted at the end of June among 32 market strategists, portfolio managers, research analysts and economists at Natixis Investment Managers and 13 of its affiliated investment managers, as well as Natixis Corporate & Investment Banking.

Headwinds Remain

When it comes to headwinds in the second half, 72% of respondents each consider geopolitics and central bank policy the most likely sources. However, a quarter of strategists call geopolitical issues “noise.” Bank policy concerns center around the question of how high and for how long rates will remain restrictive before inflation is back to target levels.

Two-thirds of survey participants see corporate earnings as a potential headwind; however, 25% are optimistic, saying earnings may act as a catalyst in the second half. Strategists are also split on the outlook for consumer spending. Half worry that a slowdown in spending will serve as a headwind, while 28% believe consumer spending will increase, providing a catalyst for market growth.

As they mull over headwinds and opportunities, 34% of the market strategists say the U.S. is best positioned for the rest of the year, and 22% think either Japan or emerging markets (excluding China) will be the winner. Just 16% think Europe will lead the market, while only 6% believe China will do so. None back the U.K.

There is strong consensus among respondents that large caps will outperform small caps, owing in part to tighter credit standards set in the wake of the first quarter banking crisis. Strategists are split 50/50 on whether growth or value will outperform to year-end.

Bond Markets

After 15 years of low and negative yields, yield returned in 2023 as central banks hiked rates to the highest levels since the global financial crisis. Yields on 10-year Treasurys reached 3.84% in June as 10-year Eurozone Central Bonds reached 3.21%.

Asked for their outlook on the second half, 47% of experts said U.S. Treasury yields will come in at 3.5% to 4% — in June, they reached 3.84%. Forty-one percent see rates receding, with 28% expecting 10-year Treasurys to drop to the 3-3.5% range. Thirteen percent think rates could move to between 2.5% and 3%.

However, the survey found concerns for fixed income investors. Seventy-two percent worry that inflation may linger longer than expected. Thirty-eight think rates could go higher and stay high for longer than expected, and a similar percentage worry about corporate defaults and downgrades.

For the most part, strategists are not worried about consumer credit and the housing market, but 69% see central bank mistakes as a medium-to-high risk. All things considered, 56% of those surveyed think long-duration bonds will outperform short-duration bonds by the end of 2023.

Equity Rally Will Likely Cool

Markets rallied in the first half of the year, thanks largely to the re-emergence of tech. The NASDAQ delivered the best first half returns in the index’s 52-year history. The tech rally, driven by excitement around artificial intelligence, also helped the S&P 500 gain 15.9%.

However, none of the experts surveyed expect the tech rally to intensify, so expectations should remain realistic. Thirty-one percent expect the rally to continue steadily, and 6% think that the bubble will burst. Half expect equities more generally to cool off in the second half and prices to dip to reflect the fundamentals.

Asked specifically about AI, 88% of strategists believe it can unlock previously undetectable investment opportunities, and 69% say it will accelerate day trading. However, 100% believe AI will increase potentially fraudulent behavior.

(Photo: Shutterstock)

Michael S. Fischer

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