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For all its ailments and splits, the world economy at large appears to have found a post-pandemic growth plateau – perhaps arguing against hyper-active monetary policy from here, but pulling investors into the mix nonetheless.

Two years of endless ‘recession or soft landing?’ debates are morphing into a ‘no landing’ global scenario – one that would have scared the horses only a year ago given its potential interest rate implications but which investors are now starting to embrace.

Bank of America’s closely-watched monthly survey of global asset managers underlined the point this week.

Although ill-defined, a ‘soft landing’ for the world economy remains the majority view – involving cooling growth rates from here that drag inflation back below targets and see interest rates ease steadily again.

But almost a quarter of the BofA survey respondents now favour ‘no landing’ over the next 12 months at least – up from last month’s 19% and almost four times the share who expected it at the end of last year.

Run for the hills?

Well, ‘no landing’ basically sees growth hold up and maybe even accelerate a bit, inflation running slightly hot and interest rates staying restrictive with maybe just modest cuts. A ‘higher for longer’ tack in other parlance – and kind of where we are at the moment and have been all year.

Skeptics argue that the rates fallout from a ‘no landing’ outcome merely leads to a harder hit further down the line – as debt stress eventually builds, defaults rise, jobless rates climb and spending slows.

But it’s not being read that way in markets – not yet at least.

Reflecting pricing behaviour this year that’s seen stock markets surge another 5-10% even as 10-year U.S. and European borrowing rates have climbed half a percentage point, the BofA survey suggests few fear this evolving ‘no landing’ view.

With one third fewer now expecting bond yields to decline at all over the coming year – 40% compared to 62% late last year – the survey simultaneously shows corporate earnings optimism and stock allocations rising to 2-year highs, with big rotations into Europe and emerging markets to boot.

GLIDING?

Individual asset managers echo that take.

Willem Sels, Global Chief Investment Officer at HSBC Global Private Banking and Wealth, reckons the shift toward a potentially ‘no landing’ scenario means he has zero cash in tactical asset allocations and has been taking an overweight positions in both global equities and bonds.

“Of course risks remain in our complex world but, as we have seen, markets are happy to take some uncertainty in their stride as long as the earnings and rate fundamentals remain constructive.”

It doesn’t take much forensic work to list the risks.

Geopolitics has rarely been more belligerent, trade flows have been disrupted by political curbs and polarizing blocs, elections in the United States and elsewhere loom later in 2024, many fret about bubbles in technology and artificial intelligence stocks, inflation seems sticky and interest rates have yet to fall.

Yet most of these risks have been in plain sight for months and appear to have neither upended the economy nor the growth outlook – and have certainly not pushed global investors back into their bunkers yet.

China’s property bust and political stand-offs did see a parallel universe develop in its markets for the past 12 months – but industrial output there appears to be revving up again this year too, regardless of the doubts and stocks have made a tentative recovery.

Even the Bank of Japan ending its negative interest rate stance after 8 years failed to provide the outsize jolt to world investment flows many suspected – at least in the early hours after that decision this week. The Nikkei stock index strengthened, largely on the back of a surprisingly weaker yen.

And for all the other potential leftfield hits and valuation concerns, the global growth horizon has been lifting since the start of the year.

The International Monetary Fund and other multilateral bodies have been nudging up world forecasts again this year.

Even though still slightly below average for the century so far, the IMF in January upped its global growth call to 3.1% for this year, two-tenths of a point higher than in October, and it expects it to tick even higher to 3.2% in 2025.

And the outlook through 2028 is for sustained annual world growth above 3%. That would bring nominal global output at market exchange rates to about $134 trillion in three years time – more than twice the average of the 10 years between 2005 and 2014.

Can central banks afford to just tweak interest rates from here and let the tighter borrowing climate in markets more generally keep inflation in check and growth afloat?

‘Real’ inflation-adjusted long-term borrowing rates have clearly bounced back from the wild swoons of the pandemic. And they too now hover just under 1% – their average of the past 25 years when measured via global debt indexes and inflation.

Strip out the post-COVID collapse in real rates and that new century average re-sets to about 1.5% for the first 20 years, making prevailing real borrowing rates still relatively modest.

And left as such, it suggests a relatively stress-free environment that may just keep the whole show on the road.
Source: Reuters (Editing by Alexander Smith)