Financial markets starting to price in potential recession – Lorcan Allen, The Business Post

Monday 23 May 2022

Kasper Elmgreen, head of equities at Amundi: ‘The idea of a recession has gone from being a very unlikely outcome to now being very likely’

Financial markets are beginning to price in the potential impact of an economic recession this year, the Irish head of Europe’s largest asset manager has said.

Kasper Elmgreen, head of equities at Amundi in Dublin, said financial markets are “very sensitive” right now due to the growing number of economic challenges on the horizon.

“Markets have not yet priced in a recession, but we’re getting there,” Elmgreen told the Business Post.

He said there were three different factors in play that could each potentially be enough to cause a recession on their own.

“The idea of a recession has gone from being a very unlikely outcome to now being very likely because there’s quite a lot of storm clouds on the horizon. The first cloud is inflation, which is still running very hot in the US and Europe.

“The second cloud is the move by central banks to dial back quantitative easing measures and raise interest rates. Markets are worried how much that will impact growth. And then you have the ongoing war in Ukraine.

“The final cloud on the horizon is the Covid situation in China where the ongoing lockdowns have caused huge problems for global supply chains and the Chinese economy,” he said.

Last week, China cut its main interest rate for mortgages from 4.6 per cent to 4.45 per cent, its lowest ever level, in a bid to support its flagging economy. A recent wave of lockdowns in China has reduced economic activity in the world’s most populous country with retail sales falling 11 per cent in April, while industrial output fell 3 per cent.

It comes as central banks in Europe and the US are raising interest rates in a bid to rein in runaway inflation. In Europe, the rate of inflation in the eurozone countries stood at a record high of 7.4 per cent for April, while in Britain inflation levels are at a 40-year high of 9 per cent.

The US economy is experiencing similarly high inflation levels, which stood at more than 8 per cent last month. Jay Powell, the chair of the Federal Reserve in the US, has said the central bank was prepared to continue raising interest rates until it constrains demand. At the same time, Christine Lagarde, the ECB president, has hinted a hike in European interest rates could happen as early as July.

Elmgreen said there has been a notable shift in the narrative from central banks on the inflation crisis since the end of last year.

“Economies were running very strong last year. And it seemed natural that we would have some transitory inflation coming out of lockdowns. But I think you could see a big shift in the narrative last December when the Fed acknowledged inflation was becoming a problem,” he said.

“Central banks are trying to orchestrate a soft landing from the current inflation spike. But the million-euro question is what will happen to property markets when quantitative easing winds down and interest rates begin to rise, particularly in the US market?,” the Amundi head of equities added.

Headquartered in France, Amundi is one of the world’s top 10 asset managers. The firm first entered the Irish market in 2016 when it acquired Pioneer Investments as part of a €3.5 billion deal. The French company now employs almost 350 people at its Dublin office, which manages over €47 billion worth of assets and is designated as one of its six global investment hubs.

Elmgreen said the key focus of his team in Dublin right now is to study the evolving economic picture and analyse what it means for markets.

“We’re now watching every consumer confidence indicator very closely to monitor the impact of inflation. And in some countries, we’re already seeing a big fall in consumer confidence. Consumers have accumulated savings during Covid-19, but it doesn’t help if they’ve no confidence to spend it,” he said.

Kasper Elmgreen, Head of Equities at Amundi, was interviewed by Lorcan Allen, Business Editor of the Business Post on the current global economic situation.