Fund managers wax optimistic as recession fears wane

NEW YORK (Reuters) - The outlook for the U.S. economy has brightened in recent weeks thanks to signs of progress on U.S.-China trade deal, giving big asset managers at this week’s Reuters Global Investment Outlook 2020 Summit a fresh sense of confidence that recession will not come knocking for a year or longer.

FILE PHOTO: Andrew Hsu, a founding partner of DoubleLine Capital, speaks during a Reuters investment summit in New York City, U.S., November 7, 2019. REUTERS/Lucas Jackson

While fund managers are showing signs of caution, the recent thawing in the trade-related tensions between the United States and China has helped soothe nerves.

DoubleLine Capital, the investment manager headed by Jeffrey Gundlach, has pared its view on the chances of a U.S. recession in the next year to 40% from 75% a few months ago, said Andrew Hsu, co-portfolio manager of the DoubleLine Total Return Bond Fund (DBLTX).

With the spike in trade tensions between the United States and China earlier this year, there were sharp drops in manufacturing, CEO confidence and corporate capital expenditures, all of which pointed to a high likelihood of a recession, Hsu said.

Since then, however, several positive reports, including earnings, strong employment numbers and wage growth that is starting to peak out, have helped brighten the economic picture, Hsu said.

“All of those indicate that maybe there are still some legs left before there is a recession,” he said.

The Federal Reserve’s pivot over the past few months - going from hiking rates over the previous three years to cutting them three times in 2019 - has also helped allay concerns.

“I was concerned earlier last year when the Fed kept hiking that they would force us into a recession,” said Anne Mathias, global rates and FX strategist at Vanguard.

“But the speed with which they walked back the December 2018 rate hike really led me to believe that they were extremely sensitive in terms of over-tightening,” she said.

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“I don’t see a recession in the near term absent some unpredictable, idiosyncratic event,” she said.

Dan Ivascyn, chief investment officer at bond giant Pimco, which has $1.9 trillion in assets under management, said he thinks the economic expansion “can last a comfortable bit of time longer, even a lot longer.”

“You don’t see the same type of end of cycle excesses that you typically see,” Ivascyn said.

Investors across the across the Atlantic are also sanguine about the global economic outlook. Pascal Blanque, chief investment officer at Amundi, Europe’s largest asset manager, considers a global recession unlikely, given markets’ expectation for stimulus still to come from policymakers.

Georg Schuh, chief investment officer for EMEA at 752 billion euro German asset management firm DWS, said “in a nutshell I would say I’m on the upper end of economic optimism. So the probability of a recession, be it in the U.S. or elsewhere, is very low.”

However, the fact that few investors expect a recession soon might be a contrarian indicator.

“Usually people are most optimistic at the peaks and most pessimistic at the bottoms. I believe there is more of a reversal at hand than the market anticipates,” said Rupal Bhansali, CIO, International & Global Equities at Ariel Funds in New York.

The market takes a lot of comfort from the wave of quantitative easing around the world, she said.

“The reason I don’t is that we have seen this playbook in Japan. Japan has tried all of these things for way longer and in way bigger size than any other country than we have witnessed,” said Bhansali.

“The fact of the matter is that it did not help.”

Reporting by Saqib Iqbal Ahmed; editing by Dan Burns and Steve Orlofsky