The April Global Fund Managers Survey is not as bearish as March 1. However, the picture is less hopeful. First, fears of the US Federal Reserve tightening more rapidly than anticipated have weighed heavily on fund managers’ optimism about global growth. BofA Securities’s April survey showed global growth expectations have hit their lowest level, with a net 71% of respondents being pessimistic.
Also, since August 2008, expectations of a stagflation recession have become the highest. “With war fears fading away, monetary risk (as a risk to financial market stability) as well as inflationary fears have increased,” the survey report said. said.
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Retail inflation in the US hit a four-decade high of 8.5 per cent in March. In India, inflation as measured through the Consumer Price Index (CPI) rose to a 17-month high of 6.95% in March. Both were affected by increased food inflation and high energy prices in the backdrop of the Russia-Ukraine conflict.
It is no surprise that the global recession remains the biggest risk to the portfolios of global fund managers. This is followed by aggressive central bank actions on interest rates, inflation, and the Russia-Ukraine conflict.
A series of negative supply shocks may not drag the US economy into recession, but the Fed’s late effort to bring inflation under control is likely to push the economy over the edge, analysts at Rabo Bank reported. “The Fed’s main policy error last year was to ignore and be blind to the rise in inflation. This has triggered a wage-price spiral that would be very difficult to reverse without propelling the economy into recession,” said Rabo Bank on April 11. stated in the report.
Sharing a similar view, Alan McIntosh, chief investment strategist at investment management firm Quilter Cheviot, said, “There is a lot of speculation about whether a recession is inevitable as a result of a rise in interest rates.” In a note to customers on April 11, he added that there is determination among global central banks to prevent inflation from becoming embedded in the system.
In its latest meeting, the Reserve Bank of India (RBI) kept interest rates unchanged but revised its inflation forecast for FY13 to 5.7%.
After the latest CPI data, the demand for a hike in interest rates in June is gaining momentum. There are upside risks to inflation due to continued supply chain disruptions.
Against this background, global bond yields have increased in some major developed markets. Indian bond yields have also risen, with 10-year government securities yields recently crossing 7%. It was at 7.2% on Wednesday.
“The yield gap between bond and earnings yields has widened. The sharp rise in bond yields reflects rising risks of inflation; higher government borrowings; and RBI’s ability to manage yields given the large amount of paper supply.” concerns,” said a report by Kotak Institutional Equities dated April 12.
So far in CY22, the Nifty 50 index remains in the positive zone, up 0.7%. However, given the higher cost pressures, the earnings outlook remains cloudy. Values are rich. Kotak has forecast the FY23 price-to-earnings multiple of the Nifty 50 index to be around 21 times. Brokerages point out that preventing a meaningful price correction would require the market to upgrade earnings to offset further increases in bond yields.
Overall global profit expectations have fallen to their weakest level since March 2020. Investors should note that past examples of such low levels of profit growth have included the bursting of the dotcom bubble, the Lehman Brothers bankruptcy and the COVID pandemic.