BNP Paribas: we don’t expect global recession

English2019. szept 27.Harsányi Péter

Which are currently the biggest risks? What is the direction of the global GDP growth? Which sectors could outperform, and how attractive is the outlook of emerging markets? Daniel Morris, senior investment strategist at BNP Paribas Asset Management based in London answered these questions in an interview to növekedés.hu.

International risk factors

We generally expect global growth to slow but only to trend rates, nothing recessionary. Daniel Morris explained that trade war is the primary driver of the slowdown so if there were a reversal (not something we're counting on), growth would likely re-accelerate.

Trade is a not a significant part of US GDP so trade war, while negative, is not going to meaningfully impact the economy (though stock market will be hurt more). The consumer remains in good shape with low unemployment, good real wage growth, and positive sentiment.

Daniel Morris, Senior Investment Strategist at BNP Paribas Asset Management

Morris added, that the latest moves by the ECB will have more impact on the markets than on growth. Besides trade and Brexit, the key issue for Europe remains lack of economic reform. Italy is receding as a risk, at least for now.

China will be able to offset the impact of the trade war with domestic stimulus (interest rate/tax cuts, credit growth), though this can only go so far given outstanding stock of bad debt from previous stimulus measures. Expectation is that once the US election gets closer, the likelihood for a deal with Trump will rise.

Probability of hard Brexit is still meaningful but it has fallen. Likely to have an election in November and were the conservatives to win, hard Brexit could again become possible.

Key market risk is disappointment in the Fed; market has priced in much bigger reductions in interest rates than the Fed is likely to deliver.

Once the market realises this, interest rates could rise (as has just happened in Europe) and equities could fall. Likely to only be a short-term problem, however. Always the risk that inflation returns; core CPI is at its highest level in over a year.

Which sectors and stock markets could outperform?

According to Daniel Morris, outlook for EM equities remains challenging. Prefer US equities. On the positive side, dollar is strong thanks to trade war which would normally help exporters except trade war means global trade is still falling.

Risk of spillover to EM interest rates if there is a sell-off in US Treasuries. Growth is modest; PMI increased from 51.5 to 51.8 in August; 11 countries saw rising PMIs and 11 falling.  Not expecting a rally in commodity prices.

No country overweights though broadly would prefer larger, less-trade-dependent countries with strong domestic demand. Prefer consumer/service sectors versus industrial/manufacturing. Consumer Discretionary, Health Care, selective Technology.