Brexit, trade wars and geopolitical tensions set to cause muted H2 say market strategists from Natixis Investment Managers and affiliated managers

Global investors should be poised to grapple with lacklustre performance over the next six to twelve months, despite a generally positive first half of 2019, according to the Natixis Investment Managers Midyear Strategist Survey, published by the Natixis Investment Institute.

The report explores the findings from 17 CEOs, market strategists and economists from across Natixis Investment Managers and its affiliated managers about what investors might expect in the 2^nd half of the year. The survey marks the first time this group has been polled together.  

Downside risks weigh heavily on market expectations

The survey was completed in July, just before the latest flare-up in the trade negotiations between the US and China. However, despite 2 years of counter-punching between the two global superpowers, often impacting global markets as it did at the beginning of last week, spill-over effects from the trade war ranked only second to a messy Brexit as the biggest downside risks to the global economy. However, respondents were much less concerned with the possibility of recession, citing “a US and/or global recession” as the least likely downside scenario.

Downside Risk

¹ Calculated average of the likelihood on a 1-5 scale with 1 being least likely and 5 being most likely. Natixis Investment Managers Midyear survey conducted by CoreData Research, June 25-July 8, 2019. 

Few strategists expect positive outcome to Brexit

The survey respondents have a general lack of enthusiasm for upside potential. Notably, few anticipate any positive Brexit scenarios and, while some hold hope that new central bank accommodations could drive a rebound in growth, just as many believe it is unlikely to work. More significantly, those surveyed did not foresee accelerating global growth or equity earnings in the next six to twelve months.

“The survey results clearly show that, in aggregate, our respondents don’t see a lot of positive market catalysts on the horizon – nor do they see a recessionary worst-case scenario as very likely in the near term. It’s a kind of a ‘muddle through’ outlook,” commented Esty Dwek, Head of Global Market Strategy, Dynamic Solutions, Natixis Investment Managers.   

She continues: “After a dismal end to 2018, equities and bonds rallied in the first half of 2019. Performance to date has been driven largely by the hopes of new rounds of central bank easing but, as what the market hoped for comes closer to reality, market strategists across the Natixis family find little to get excited about. Perhaps the best news is that despite projections for lacklustre performance, they are not calling for a dramatic retreat from the impressive gains. After the stinging losses in Q4 2018, maybe ‘meh’ is something to be excited about after all.”

Upside Risk

² Calculated average of the likelihood on a 1-5 scale with 1 being least likely and 5 being most likely.  Natixis Investment Managers Midyear survey conducted by CoreData Research, June 25-July 8, 2019. 

Asset class outlook

With a strong expectation of Fed rate cuts on the horizon, Natixis strategists are most bullish on US Sovereign bonds, followed by emerging market equities, global REITs and emerging market bonds of all types (hard currency, local currency, and corporate). The common thread running through these bullish forecasts is accommodative central bank policy and ample global liquidity. In turn, respondents are most bearish on cryptocurrencies, UK stocks, US high yield and bank loans.

Weighted Net Bullish–Bearish Score³

³ Weighted sum of bullish responses (>5) minus bearish responses (<5) for each asset class based on a 1-10 scale (1 = most bearish, 10 = most bullish) with 5 being neutral. Natixis Investment Managers Midyear survey conducted by CoreData Research, June 25-July 8, 2019. 

Across asset classes, the survey found that:

• Equities: Natixis strategists predict little in the way of equity returns in the US and Eurozone over the next six to twelve months. But that’s not to say the consensus calls for dramatic losses either. Overall, the outlook on equities is balanced and no strategists forecast a bear market (-20%) or even a market correction (-10%) in this time frame.
• Fixed Income: Central banks continue to be the focus as Natixis strategists anticipate more dovish policy from both the U.S. Federal Reserve and the European Central Bank (ECB). On average, the strategists predict the Fed will ease rates back by 50 basis points by year end. In Europe, respondents see further easing from the ECB and anticipate a 5–10 bps reduction in the overnight deposit rate. Consensus is not as strong on ECB cuts, as almost half (8 out of 17) forecast no change to the overnight deposit rate. This may indicate that rather than reducing rates the ECB may first try other levers such as offering additional forward guidance, restarting large-scale asset purchases (QE), or tiering the deposit rate.
• Currencies: The trend toward more dovish interest rate policy from the Fed and ECB is pronounced in strategist sentiment on currency. Overall expectations for volatility run strongest here with 10 of 17 forecasting increased currency volatility and no one anticipating any declines. 
• Commodities: On average, strategists see gold falling slightly by 1–3%, but the respondents were very evenly split. Meanwhile, respondents see Brent crude falling by around 5% in the same period.
• Volatility: Natixis strategist projections for volatility go hand-in-hand with their equity outlook, anticipating a slight increase in volatility with the VIX rising 2.1 points from its mid-year level of 15.1. This average projection to 17.2 represents a modest but meaningful increase in volatility overall. Across broad assets, and in contrast to recent market readings, the respondents saw currency volatility picking up the most, followed by equity volatility, with bond/interest rate volatility likely to move the least.