Major economies are closing in on a recession and the rich want to cash out
The third quarter company earnings and the better than expected economic data has put the US market back on track, with the S&P 500 claiming new all-time highs. While manufacturing continues to contract and inflation remains low, the investors are still cheery about the consumer spending and the low unemployment levels in the US. Fed is doing its best to reduce the pressure on the yield curve which has been inverted since May (a recession indicator). All in all, there is a 27% chance that the US will fall into a recession in 2020, according to Bloomberg Economics.
However, things don't seem as positive in the middle of the globe where several major economies are already caught up in the global slowdown. Central banks are continuing to lower interest rates to near zero or below to help with economic growth but most indicators point towards a technical recession.
The UK, while being caught up in its ongoing uncertainty over leaving the European Union, saw a negative GDP growth for the first time since 2012, and a no-deal Brexit could well slide it into a recession. Germany, the EU’s biggest economy, is constantly being hit with a declining manufacturing sector and global auto sales, and is on the brink of recession with 0.1% GDP growth in the previous quarter. Italy, the EU’s fourth-largest economy, was in a technical recession for the second half of 2018. While GDP growth is on the positive side at this point, the economic woes continue due to weak productivity, high unemployment, huge debt and political turmoil which can easily slide the country back into the recession territory.
The world's fastest growing economy, China, is also finally witnessing a slowdown amid the trade with the US. While GDP growth for the export giant is still above 6%, the IMF forecast only 5.8% growth in 2020, down from 6.6% in 2018 and 6.1% forecast in 2019. It is worth noting that some other emerging markets such as Turkey, Argentina, Iran, Mexico and Brazil, are also highly stressed.
Hence, while market participants continue to see reasons to be bullish, the wealthiest around the globe are well aware of these winds of change are starting to hoard more cash rather than stay in markets as we get close to 2020. A majority of rich investors expect a significant drop in markets before the end of next year, and 25% of their average assets are currently in cash, according to a survey of more than 3,400 global respondents (It is worth noting that this figure was 32% in the May survey).
According to the UBS Investor Watch for November, a survey which includes investors with at least $1 million in assets, also highlighted that the major major concern for this wealthy class is the U.S.-China trade conflict, while the upcoming American presidential election is also a key concern. Other interesting survey answers included:
- 20% of respondents say volatility is likely to increase
- 55% think there will be a significant market sell-off before the end of 2020
- 60% are considering increasing their cash levels further,
- 62% plan to increase diversification across asset classes.
- 70% of respondents globally are optimistic about investment returns over the next 10
S. Khan
Head of Investment Research