Where's the recession? |
Tweet | ![]() |
<p><strong>Ruth Saldanha: </strong>With escalating trade tensions and inverted yield curve in the U.S. and a prolonged expansion, there is increasing speculation that we might be headed into a period of slowing growth and possibly a recession. But is it likely? Though this isn't his best case forecast, RBC Global Asset Management's Chief Economist Eric Lascelles argues that in the best case scenario, arguments could be made that support the current economic expansion continuing for several more years. But should you make your investment decisions based on that? Eric is here today to explain his point of view.</p>
<p>Eric, thank you for being here today.</p>
<p><strong>Eric Lascelles: </strong>Thank you for having me.</p>
<p><strong>Saldanha: </strong>Most of the key indicators point towards a recession. But that hasn't happened yet. So, what's holding this economic cycle up?</p>
<p><strong>Lascelles: </strong>Well, I think, to begin with, it's worth recognizing there are some fairly different aspects to the economy today. And so, we're all very focused, of course, on a manufacturing sector that clearly is in decline almost globally. Let's equally acknowledge that the consumer sector is actually held up fairly well. So, there's a real mix of stories and perhaps not all in quite the state of decline as one would first imagine. Of course, we've seen inverted yield curves, and that is a classic recession signal. But let's acknowledge two things about that.</p>
<p>The first is that even when you get that signal, and even when it's telling the truth, historically, there has been about a year between the signal triggering and actually falling into recession. And so, in that sense, it perhaps is no great surprise that a recession hasn't happened quite yet. But equally, and again, focusing on the yield curve, it's equally worth acknowledging that there are some different things about the yield curve perhaps today than in past cycles. And maybe the most obvious one is that there's no real term premium that we can find in the bond market. And in theory, if you have no term premium, you need that yield curve to invert by notably more than we've seen so far. So, you could argue whether the signal is actually fully triggered. And so, I think that's at least part of the story why we haven't stumbled into a recession just yet.</p>
<p><strong>Saldanha: </strong>You have three main scenarios, your best, base and worst case scenario. Let's start with the worst. What's your worst case scenario from here on?</p>
<p><strong>Lascelles: </strong>Well, I think the worst case scenario is simply that the yield curve is absolutely telling the truth. And maybe we even see a recession come towards the sooner versus the later end of the historical range. And so, I guess, recession is the answer to that question. But equally, I would acknowledge, even if we were to stumble into a recession in the extreme near term, in a worst case scenario, it still seems unlikely to be as dire as the one from a decade ago. We just don't have the same sort of financial market imbalances that that pervaded at that moment.</p>
<p><strong>Saldanha: </strong>And then, what's your best case scenario?</p>
<p><strong>Lascelles: </strong>Well, the best case scenario is an interesting one. And again, Let's not argue it's the most likely; somewhere in the middle is, in fact, most likely. But I think the best case scenario just doesn't get much attention. So, it's interesting to draw that out for a moment. And so, really, the best case scenario is just that this expansion keeps going. And so, people have written it off. And indeed, it is fairly likely that it comes to a close over the next year or so. But this thing could keep going, the expansion could continue. In terms of why it could continue, some might have to do with that yield curve analysis we just engaged in. Possibly that signal is distorted this time around. A fair bit has to do with the notion that perhaps there's more economic slack in the world than we currently think. Certainly, unemployment rates are very low. But other metrics aren't quite confirming that signal. And there are a lot of discouraged job seekers perhaps still at the periphery who prevent the overheating that often triggers a recession. And then, lastly, and I mentioned this for a moment just a minute ago, it's not obvious that there are the big financial imbalances that historically have often triggered recessions. And I wouldn't want to suggest you can't have a recession without one of those. But those tend to be the triggers and they tend to trigger some of the deeper recessions. And we can, of course, find imbalances when we look but they're not on the scale of the world's biggest housing market being in something of a bubble. It's just not that big this time round. So, this expansion could just continue. We might check in in three years, and possibly, it's still going.</p>
<p><strong>Saldanha: </strong>But in your opinion, which is more likely, an expansion or a contraction right now?</p>
<p><strong>Lascelles: </strong>Gee, it's a good question. And so, I guess, I would say, if you're talking about over the next year, I'd say an expansion is still more likely. Maybe it's a 60 per cent chance versus a 40 per cent chance, so hardly a slam dunk by any means. But most of the time, economies grow, they are built for growth, that is the natural state of affairs. You have productivity rising, you have more workers coming into the system. And so, it's a fairly rare occurrence to suffer the reverse. But equally, the risk of a downturn is bigger than it usually is. So, normally, perhaps your odds are 80 or 90 per cent expansion and 10 or 20 per cent recession. And here we are maybe sitting in more of a 60 to 40 per cent proposition right now.</p>
<p><strong>Saldanha: </strong>So, what should investors do right now?</p>
<p><strong>Lascelles: </strong>Yeah, so that's the challenge. And of course, they need to factor in all sorts of different considerations ranging from the level of interest rates to stock valuations, to the macro trend. And of course, the longer one's investing time horizon, the less one has to fret about the short term. And so, those with the luxury of decades of investing can probably ignore just about all of this and just sail on their merry way. One of the things that we've done, recognizing the lateness of the cycle, the higher than usual recession risk is, we are taking less investment risk than we normally do. And so, we're still very happy to own stocks. We think stocks will generate the superior long-term return. They do have a better valuation versus bonds right now as well as it happens. But if you see a bigger than usual recession risk, clearly, that's the obvious counterpoint. And so, we're taking less risk than usual. It's not a heading for the hills moment. It's very much we're closer to our neutral allocation having taken more risks earlier in the cycle. And that does mean holding a little more in fixed income, holding a little bit more in cash as well. But in a world in which cash doesn't return very much and fixed income doesn't offer you much more than that, if at all these days, it's not a time for going heavily into bonds either.</p>
<p><strong>Saldanha: </strong>Thank you so much for joining us today, Eric.</p>
<p><strong>Lascelles: </strong>Thank you.</p>
<p><strong>Saldanha: </strong>For Morningstar, I'm Ruth Saldanha.</p>

16/04/2021 Amazon.com and ServiceNow are looking increasingly attractive.

15/04/2021 Investment tips from Australian equities fund manager Kate Howitt.

14/04/2021 What is income investing, why is it important and which investors should focus on it? Morningstar Investment Management's Dan Kemp has the answers.

13/04/2021 Morningstar equity strategist Gareth James discusses the great value rotation, why he believes the Australian share market is overvalued and where opportunities still lie for hungry investors.

12/04/2021 But the sector's current tailwinds are likely unsustainable, so investors should prioritise high-quality businesses with stable balance sheets, says Morningstar's Dave Meats.

08/04/2021 Kate Howitt oversees Fidelity’s Australian Opportunities fund. She discusses her investing approach, the outlook and where she sees value.

07/04/2021 Goldman Sachs's Laura Destribats talks about the millennial investment trend, and why tech and experiences are so important to this generation.

06/04/2021 Remember that the returns on speculative assets like Bitcoin are high risk

01/04/2021 Steve Johnson explains why Forager Funds Management has bought and held Enero, SG Fleet and Zebra Technologies and why they're poised for further growth.

30/03/2021 Forager's Steve Johnson explains why he's bullish on consumer spending, enterprise software companies, and why he has cashed in on big names like Uber.

29/03/2021 Kristiaan Rehder explains why the West Australian biotech is among the top performers in the Bennelong Kardinia Capital Absolute Return Fund.

26/03/2021 And how to make inflation "personal."

25/03/2021 The how, what, and why of cryptocurrency.

24/03/2021 An absolute return fund aims to seek returns in all weather. Kristiaan Rehder from Bennelong Kardinia Capital explains how.

23/03/2021 Diversified portfolios, strong balance sheets and healthy payouts. Grant Berry singles out three big contributors to the SG Hiscock Property Income Fund.

22/03/2021 SG Hiscock's Grant Berry explains how real estate was affected by the pandemic, how property stocks coped, and the chase for income in an evolving retail landscape.

19/03/2021 Video gaming has soared under lockdown, can this sector keep growing post-covid? Morningstar analyst Neil Macker takes a look.

18/03/2021 The retail giant's strong balance sheet will help it navigate the shift to online shopping and capitalise on the return to normal life, says Morningstar's Johannes Faul.

10/03/2021 Ahead of Deliveroo's IPO, Morningstar analyst Ioannis Pontikis looks at the outlook for the business, its valuation and concerns about gig workers.

08/03/2021 E-learning has become the norm for young students and university-goers across the world. Morningstar analyst Michael Field looks at whether the trend is here to stay.

04/03/2021 Special guest Peter Warnes, our head of equities research, joins the Morningstar Foundations of Investing Webinar series to give his unique take on February Reporting Season and answer subscriber questions.

03/03/2021 The growth and adoption of exchange-traded funds has only accelerated as a result of the latest market crisis.

01/03/2021 Morningstar's Nathan Zaia on the outlook for the banks, dividend payouts and the move by the Bank of Queensland to acquire ME Bank.

25/02/2021 The biggest takeaway from that period is not to panic when the market tumbles.

23/02/2021 From ETFs backed by bullion to miners with more upside potential - here's how to get yourself some gold.

23/02/2021 If the US is to stage a recovery by mid-year, it will need the consumer services sector to fire, says Morningstar's head of economic research Preston Caldwell.

19/02/2021 Morningstar's Brian Han weighs up News Corp's deal with Google and examines the effect of Facebook's decision to block content from Australian media outlets.

18/02/2021 Quay Global Investors' Chris Bedingfield explains how self-storage, data centres and industrial property can offer diversification and growth.

16/02/2021 Uniti Group and Nextdc are among the companies that SG Hiscock's Hamish Tadgell says have flourished during the pandemic.

15/02/2021 Hamish Tadgell of SG Hiscock explains the portfolio changes he’s made in a bid to capitalise on the shift.

10/02/2021 Which pandemic-related trends have already passed, and which ones might be around the corner?

05/02/2021 The battle between the Reddit army and hedge funds is nothing new—the question is will regulators be willing to step in, says Morningstar's John Rekenthaler.

03/02/2021 Competition is fierce for fast fashion retailers such as Asos, H&M, Zalando and Inditex. Morningstar analyst Jelena Sokolova takes a look at the sector.

01/02/2021 Volatility can be around any corner, says Morningstar director of personal finance Christine Benz.

28/01/2021 Retirees require stocks' growth potential, but they need a cash and bond buffer, too.

27/01/2021 Rebecca Jiang, manager of the JPMorgan China Growth & Income Trust, looks at why Chinese stocks soared in 2020 and whether the trend can continue.

25/01/2021 Redpoint's chief executive and portfolio manager Max Cappetta tells Lex Hall why he's got his eye on JB Hi-Fi, Goodman and Reliance Worldwide in 2021.

21/01/2021 Redpoint CEO and portfolio manager Max Cappetta looks at the dividend potential of large-cap names, the resilience of Qantas, and the local tech landscape.

19/01/2021 Stocks still look cheap across all subsectors, especially oilfield services and refining, says Morningstar analyst Dave Meats.

19/01/2021 What are the rewards and risks of using this technology?

15/01/2021 Morningstar's head of policy research Aron Szapiro explains what sort of changes a Biden government will make and how they will affect company valuations.

14/01/2021 Freight-rail, building temperature efficiency, and carmaking are among the sectors Aviva Investors' Jaime Ramos Martin has his eye on.

13/01/2021 Dividend investors had a hard time in 2020, but Morningstar analyst Dan Lefkovitz think the outlook is brighter for the year ahead.

11/01/2021 Morningstar Investment Management's Dan Kemp reveals the three investment themes on his mind for the year ahead.

06/01/2021 Morningstar equity analyst Allen Good looks at the prospects for oil and gas giants in the year ahead.

05/01/2021 China had a strong year after a rocky start, but can it continue—and what does a US President Biden mean for the region? Morningstar analyst Lorraine Tan explains.

04/01/2021 Morningstar equity director Alex Morozov considers the outlook for tech, travel and beyond for the year ahead.

01/01/2021 How to plan for things you can't plan.

25/12/2020 2020: we look back at the highs and lows of an unprecedented year in financial markets and explore the themes shaping 2021.

22/12/2020 Music streaming companies have seen stellar growth in user numbers. We ask Morningstar equity analyst Neil Macker if the trend can continue.

21/12/2020 While it stands as the largest addition in the index's history, this likely won't impact everyday investors all that much.

18/12/2020 Will there be opportunities to deploy cash in the new year? Will there be a reprieve from covid? And what will the incoming Biden administration mean for markets?

18/12/2020 Companies that specialise in solar, building efficiency and renewables underpin Aviva Investors' Climate Transition Global Equity Fund, says Jaime Ramos Martin.

16/12/2020 Why does liquidity matter to investors, and how can it affect your returns? Morningstar equities director Tom Whitelaw explains.

14/12/2020 Learn what we look for when rating a company.

14/12/2020 Morningstar's new approach unpacks the environmental, social and governance risks that companies face.

10/12/2020 Industrial companies typically generate better cash flows and can offer a steady income stream, says the IML founder.

09/12/2020 The lofty valuations of Tesla and Afterpay typify the effervescence and speculation in the market, says the IML founder.

08/12/2020 Car makers may not be an obvious investment choice for ESG-conscious investors, but Morningstar analyst Tancrede Fulop says some of the largest companies score highly in some measures such as safety and human capital.

07/12/2020 Janus Henderson's Matt Peron considers how the relationship between the US and China will evolve under a President Biden.

04/12/2020 What is active investing, and what is passive investing? We're at the whiteboard to explain the pros and cons of each

04/12/2020 Treasury Wine Estates remains an undervalued stock in spite of China's demand-destroying tariff on Australian wine. Morningstar director of equity research Adam Fleck explains why.

03/12/2020 And do any other assets currently compare?

02/12/2020 We're at an inflection point in ESG investing, says Sustainalytics founder Michael Jantzi. Here's why.

01/12/2020 Beaten-down travel stocks and BNPL providers featured heavily, says nabtrade’s Gemma Dale.

30/11/2020 Many people were waiting for the opportunity to buy shares at historic discounts, says nabtrade’s Gemma Dale.

27/11/2020 The 171-year-old wealth manager has had its scandals but there's merit to its turnaround strategy and the quality of its other assets, says Morningstar's Shaun Ler.

27/11/2020 BNPL products such as Zip Co help boost consumer spending but they come with risks and are overvalued, says Morningstar analyst Shaun Ler.

26/11/2020 The Magellan co-founder argues the ecommerce acceleration is here to stay and ponders the effect it will have on other sectors such as travel and commercial real estate.

25/11/2020 Greg Dean of Cambridge Global Asset Management explains why the consumer services sector has yielded healthy returns.

25/11/2020 Magellan's co-founder explains which tech behemoth the Magellan Global Fund no longer owns, why one was too tricky to value, and why regulation is no threat.

24/11/2020 Magellan's co-founder on why 2020 resembles 2000 and why covid-19 is a dry run for something that could be much worse without proper planning.

23/11/2020 Their shares have gotten hammered this year. Are they opportunities or value traps?

20/11/2020 Our new rating highlights the degree to which a fund or asset manager considers environmental, social, and governance issues.

19/11/2020 Morningstar's Grant Kennaway explains why sustainable funds are increasingly popular and why they're performing well.

17/11/2020 Morningstar director of equity research Johannes Faul looks at home improvement retailer Bunnings.

16/11/2020 From climate change to workers' rights, ESG is a big part of the investing world. We're at the Morningstar whiteboard board to explain what it means and why it matters.

12/11/2020 We're not out of the woods yet, says our head of equity research, as he looks for safety in businesses we can't live without and shies away from the banks.

11/11/2020 Perhaps it is time to have exposure to this economic powerhouse and its 1.4 billion population, says Morningstar's Peter Warnes.

10/11/2020 What happens when you buy something when your bank card? Morningstar analyst Niklas Kammer explains which companies are benefiting from your transaction.

09/11/2020 With travel bans and economic lockdowns, the luxury sector has been hit hard in 2020. But there are still opportunities, says Morningstar analyst Jelena Sokolova.

05/11/2020 A discussion of taxes, stimulus, regulation, and the likely market reaction as results from the 2020 poll come in.

03/11/2020 Why you should resist the urge to make predictions when there's a disconnect between the economy and security prices.

02/11/2020 Etoro analyst Josh Gilbert shares his thoughts on Beyond Meat and two other companies making inroads into the plant-based meat sector.

30/10/2020 The Magellan rainmaker explains why he doubts the Republican leader will prevail and why investors should brace for volatility—and ignore it.

29/10/2020 The market for plant-based meat is worth $14bn today and is expected to grow massively, says eToro's Josh Gilbert.

28/10/2020 Morningstar equity analyst Johannes Faul explores the flipside to the surge in growth in online sales.

22/10/2020 China and Hong Kong have been a happy hunting ground, says Longlead Capital Partners' co-founder Andrew West, who singles out tech, pharmaceuticals and power tools.

22/10/2020 These names stand to benefit from a resumption of leisure travel - and are all trading below our fair value estimates.

20/10/2020 Morningstar's Mark Preskett looks at three reasons why bonds are an important tool in your investment portfolio.

19/10/2020 A bigger stake in the online conveyancer PEXA could be the key to increasing Link Administration's revenue, says Morningstar's Gareth James.

16/10/2020 Longlead Capital Partners co-founder Andrew West reveals how his Asia-focused fund managed to make gains during the historic covid-19 sell-off.

16/10/2020 The investment board is back with an explainer on why you might invest in bonds.

13/10/2020 How to handle this decision—even when it is made for you.

12/10/2020 Nick Griffin of Munro Partners reveals why and where he sees opportunities in renewable energy, diagnostics and software.

09/10/2020 Take stock of your spending to determine if inflation is an issue for you.

09/10/2020 Morningstar analyst Chelsey Tam explains why investors are excited about the flotation of Ant Group and why it's different from Alibaba.

06/10/2020 Companies that address the growing demand for decarbonisation will have a 20-year growth opportunity, says Nick Griffin of Munro Partners.

30/09/2020 EXCLUSIVE EXTRACT: Morningstar's Mat Hodge and Lex Hall talk to the CEO of the independent producer and exporter about the company's fortunes and its future.

30/09/2020 Slow and steady wins the financial race.