The April global fund manager survey is not as bearish as the March one. However, the picture is of little hope. To begin with, fears of faster-than-anticipated tightening by the US Federal Reserve have weighed heavily on fund managers’ optimism around global growth. The April survey by BofA Securities showed that global growth expectations plunged to their lowest with a net 71% of respondents being pessimistic.
Also, the expectations of stagflation have risen to the highest since August 2008. “With war fears fading, stagflation fears have risen along with monetary risk (as a risk to financial market stability), now to its highest level ever," the survey report said.
Retail inflation in the US has jumped to a four-decade high of 8.5% in March. In India, inflation measured via the consumer price index (CPI) rose to a 17-month high of 6.95% in March. Both were affected by elevated food inflation and higher energy prices against the backdrop of the Russia-Ukraine conflict.
Little wonder then that global recession remains the top tail risk to the portfolios of global fund managers. This is followed by hawkish central bank act-ions on interest rates, inflation, and the Russia-Ukraine conflict.
The series of negative supply shocks may not pull the US economy into recession, but the Fed’s late attempt to get inflation under control is likely to push the economy over the edge, pointed out analysts at Rabo Bank. “The Fed’s main policy error was to ignore the rise in inflation last year and getting blindsided. This has set in motion a wage-price spiral that will be very difficult to reverse without hiking the economy into recession," said the Rabo Bank report on 11 April.
Sharing a similar view, Alan McIntosh, chief investment strategist at investment management firm Quilter Cheviot said, “There is much speculation about whether recession is inevitable as a result of interest rates going up." In a note to clients on 11 April, he added that there is a growing determination among global central banks to stop inflation becoming embedded in the system.
At its latest meeting, the Reserve Bank of India (RBI) kept interest rates unchanged, but revised its inflation forecast for FY23 higher to 5.7%.
After the latest CPI data, the clamour for an interest rate hike in June is getting louder. There are upside risks to inflation because of continuous supply chain disruptions.
Against this backdrop, global bond yields have risen across some key developed markets. Indian bond yields have risen, too, with the 10-year G-Sec yield recently crossing 7%. On Wednesday, it stood at 7.2%.
“The yield gap between bond and earning yields has widened. The sharp rise in bond yields reflects rising inflation risks; high government borrowing; and concerns about the RBI’s ability to manage yields given large paper supply," said a report by Kotak Institutional Equities on 12 April.
So far in CY22, the Nifty 50 index has remained in the positive zone, up 0.7%. However, the earnings outlook is cloudy given elevated cost pressures. Valuations are rich. Kotak estimates the Nifty 50 index’s FY23 price-to-earnings multiple at nearly 21 times. The brokerage points out that the market will require earnings upgrades to offset further increase in bond yields to prevent a meaningful price correction.
Overall global profit expectations have fallen to their weakest levels since March 2020. Investors should note that previous instances of such low levels of profit growth include the bursting of the dotcom bubble, the Lehman Brothers bankruptcy, and the covid pandemic.
