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‘Profit recession’ warning as markets wait for aggressive central bank moves

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A trader works on the floor of the New York Stock Exchange (NYSE) in New York, June 13, 2022.

Brendan McDermid | Reuters

Global stock markets diverged on Tuesday after a worldwide sell-off in the previous session, as analysts assessed the longevity of the bear market and risk of recession.

U.S. stock futures bounced in early premarket trade on Tuesday after the S&P 500 slid back into bear market territory the day before. 

Investors are awaiting a landmark monetary policy announcement from the Federal Reserve on Wednesday, with bets on a 75 basis point interest rate hike rising in light of a shock 8.6% annual inflation print for May.

The prospect that the Fed and other central banks will be forced to hike interest rates more aggressively in order to rein in inflation — at a time when growth is slowing across most major economies — has reignited fears of a global recession.

Profit recession

Guy Stear, head of EM and credit research at Societe Generale, told CNBC on Tuesday that while a recession was looking more likely, there were two prongs to consider.

“One is the pure economic outlook, and secondly the profit outlook. I would actually be more worried about profits than I would about economic growth itself,” Stear said. 

He said that the more-than 25-year trend of profit rising as a percentage of GDP was “more or less finished,” given the ongoing themes of deglobalization, higher energy and input costs, and higher wages.

“So I think that no matter what happens in terms of the economic outlook – and yes, the likelihood of an economic recession is mounting – the likelihood of a profit recession is mounting a lot faster.”

Central banks ‘starting to panic’

As well as the Fed, the Bank of England, Bank of Japan and Swiss National Bank are all set to announce monetary policy decisions this week. Each is facing its own set of economic challenges, along with the global problems of soaring food and energy costs, and supply chain disruptions.

“What we’re currently seeing is central banks somehow starting to panic, markets clearly facing all of a sudden this new era of higher interest rates, therefore we have this big stock market correction, I think rightly so,” said Carsten Brzeski, global head of macro at ING. 

“With central banks now tightening monetary policy, somehow panicking, the likelihood of a recession in the U.S., but also in the euro zone towards the end of the year, has clearly increased.”

Get defensive

In terms of positioning in response to the current pullback, Soc Gen’s Stear suggested that several defensive areas of the corporate credit market could offer some protection for investors.

“My personal view in terms of where we are on the bear market is we’re about three-fifths of the way through it in credit markets, so I’m waiting for another 80 basis point widening in terms of credit, which means losses of probably not double digits, but close to, in the equity markets before I really start to get interested in terms of valuations,” he said.

In particular, Stear identified energy and utilities, the latter of which he argued represents a necessity in the move towards clean energy and the green transition. However, he also remains positive on the banking sector.

“I think banks have deleveraged so much in the past 10 years that they’re a lot less sensitive to the economic variations, particularly in Europe, than they would have been 10, 15, 20 years ago, so I think that’s more of a defensive sector than people realize,” Stear said.



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