Market Outlook

What Ray Dalio, and other major fund managers, think about a recession

There was much sombre talk in 2019 that a slowdown in the US economy was a prelude to recession. In the end it didn’t happen. Now, however, fund manager Ray Dalio has softened his position on imminent recession. What are others in the industry saying?

A New Year can sometimes make us think twice about what the future awaits. This is no different for famed investor Ray Dalio, founder of investment firm Bridgewater Associates. 

Before the fireworks and clinking glasses Dalio told CNBC in August that there was a 40% chance of a recession before the November 2020 Presidential election. He had previously stated that the chance was as high as 70%.

Dalio was not the only one. Last year saw an abundance of threats as the yield on the 10-year Treasury note breaking below the 2-year rate – in the past a harbinger of recession – the trade war between the US and China, as well as struggling global economies such as Germany.

But since, some fund managers – Ray Dalio included – have tempered their attitudes towards an imminent recession. Can investors breathe easy?


Chance of a recession before the US Presidential election in November, according to Ray Dalio


Time to relax?

In August last year, the view from Dalio was far from rosy. Fast-forward to today and Ray Dalio’s perspective has shifted. He recently predicted that there will not be a recession this year after all. In an interview with CNBC he said he did not think a downturn in the US was likely in 2020 and urged investors to come off the market sidelines and build a global and well-diversified portfolio.

A survey of global fund managers by Bank of America Merrill Lynch in January found that 36% of professional investors now expect global growth to improve over the next 12 months, up by 7% on December, according to Funds Insider.

Fund managers were said to have “completely priced out” recession risks and boosted their equity allocations to 32% overweight.

However, this is still below the 50% mark seen in bullish markets, Funds Insider notes. Fears remain over the impact of the election in November and continuing trade uncertainty between the US and China, despite the recent signing of a “Phase One” deal.

Andrew Pease, global head of investment strategy at Russell Investments, recently told Funds Insider that the “tentative green shoots” in global manufacturing could not only hold off a recession but could mean “we might be on the cusp of another mini-cycle recovery through the first-half of 2020”. He now forecasts a recession in late 2021 instead. 

Sheila Patel, chairman of Goldman Sachs Asset Management, recently told Fortune that the firm forecasts the probability of a recession in 2020 in the US and eurozone in the range of 20% to 25%.

“The questions around the trade war are certainly a concern, and election years can always be unpredictable. But we’ve had a de-escalation in the U.S.-China situation, and we’ve also had the removal of a no-deal Brexit risk, though it remains to be seen how that evolves, Patel stated.

Scott Thiel, manager of BlackRock's Fixed Income Global Opportunities fund, told Fund Insider that the “protectionist push Is waning at the margins and the mood music has improved when it comes to global trade”.

“Protectionist push Is waning at the margins and the mood music has improved when it comes to global trade” - Scott Thiel, manager of BlackRock's Fixed Income Global Opportunities fund

Thiel says that valuations remain “relatively reasonable” and that BlackRock “are looking at cautiously rotating into cyclical markets that will perform better in the macro framework we are expecting”.

Goldman Sachs AM also seems mildly optimistic and Patel says the firm expects moderately higher economic activity than in 2019, but that growth will be slower in the US, China and Japan. However, she said when the firm considers the overall picture, its “not seeing the negatives that have made people nervous about owning equities”. 

Meanwhile Nicholas Reece, senior financial analyst and portfolio manager at Merk Investments, was also feeling bullish. In an interview with the Epoch Times he notes that while there were still some concerning pictures he thinks “there are enough recession disconfirmations to make me more positive than negative”.

Indeed, he estimated recession probability over the next six months to be around 10-25% compared with the 30-45% mark he saw last November. Adding to his confidence are new housing starts on a cycle high and a drop in the high-yield credit spread.

“My base-case view is that we are in the process of coming out of a mid-cycle—or perhaps late-cycle—slowdown, and that we will see further evidence of cycle extension.”


Enter the bears

However, Reece warned that the US is not yet out of the woods.

“I still really want to see some of these key indicators improve over the next two or three months in order to get confirmation,” he says. 
Deloitte US chief executive Joe Ucuzoglu is wary. At the World Economic Forum in Davos, he told Yahoo Finance that the “underlying tensions” between the US and China are not completely resolved, while other issues still remain.

“I still really want to see some of these key indicators improve over the next two or three months in order to get confirmation” - Nicholas Reece, senior financial analyst and portfolio manager at Merk Investments

“There are still geopolitical issues out there, slowing in some major economies across the globe. Cyber (security risk) hasn’t gone away either.,” Ucuzoglu said.

He also notes that it’s “impossible to predict which and when any of those come to fruition,” adding that he considers it “dangerous to suggest that somehow the risk of a recession is behind us.” 

Greg Davis, Vangaurd CIO, echoed this bearish sentiment. 

“The likelihood of a large drawdown for equities and other risky assets remains high, he tells the Financial Times, warning that investors should continue to be prepared for “geopolitical uncertainty and unpredictable policymaking” that has plagued recent years and will continue to do so in 2020.

It will be a fascinating few months ahead to see if the bulls or the bears win the day, and which of the above predictions come true.

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