Speaking at a webinar, Robeco fixed income client portfolio manager, David Hawa, said if an investor had bought 10-year US Treasuries at the beginning of this year, they would have lost 10% due to inflation and aggressive central bank rate hiking.
“Now we need to go back all the way back to [1788]. As the graph indicates over there to get a worse start of the year. Even 2008.. did not have such negative returns,” Hawa said.
Consumer confidence, producer confidence, inverted yield curves and housing affordability all indicated that trouble was coming, according to Robeco.
Hawa said periods of low unemployment, high inflation and central banks hiking rates normally lead to recessions, as depicted by the grey areas in the chart below.
“So therefore this is why we at Robeco, on the macro side, believe that in 2023, [there is] more than a 50% increase in terms of a probability of a recession that’s going to happen next year in the US.
“Europe, definitely showing even more signs of recession, as the impact of higher oil prices starts hitting the economy.”
Sander Bus, co-head of Robeco’s credit team, said: “Recession risk has increased and the market has moved towards that scenario as well.
“Nevertheless, we are not yet in the phase of capitulation and unjustified cheapness. These opportunities might very well occur in the next three to six months.”
Robeco said there were more parallels to the 1970s episode.
“Policymakers at that time also argued that inflation was transitory since it was initially triggered by external shocks.
“Even though they were all temporary shocks, together they caused individuals to expect higher inflation, entrenching the inflationary dynamics further and contributing to a self-reinforcing spiral of wage-price inflation.
“We do not see inflation spiralling out of control yet, but it is a scenario that central banks are desperate to avoid, given this type of inflation can be very difficult to fight.”
He therefore noted wage growth was an important indicator that central banks were monitoring, acknowledging Australia’s strong wages and employment reports of 2.4% Wage Price Index in Q1 and unemployment of 3.5% in June.
Robeco noted uncertainty about the amount of monetary tightening required to achieve price stability and a return of inflation rates back down to mandated targets was creating high volatility in fixed income markets.
Victor Verberk, co-head of the Robeco credit team, said: “It once again stresses the importance of being contrarian in these markets.
“One can be wrongfooted by aggressive bear market rallies and should try to take risk when most people let go – and vice versa. Market liquidity is very fragile, and one should use that to your benefit.”
