KUALA LUMPUR (July 5): The US economy is not anywhere close to recession in the next six- to 12 months, with the country’s labour market remaining strong and with renewed demand for houses, says UOB Asset Management (UOBAM).
Dharmo Soejanto, chief investment strategist of UOBAM Invest in Singapore, said that there were 10 million job openings even after the US Federal Reserve (Fed) raised interest rates by 500 basis points since March 2022.
“It is very difficult for us to envisage a recession coming from such a situation when the labour market is still tight; people can still demand higher wages,” Dharmo said at the UOBAM Mid-Year 2023 Outlook Forum on Wednesday (July 5).
He added that there is a re-acceleration of new home sales, as people expect the interest rates in the US to have stabilised.
“Basically, that suggests construction activity would be fairly strong in the second half of 2023 (2H2023), which is another engine of growth that would prevent recession,” Dharmo said.
In light of a no recession scenario, Dharmo said interest rate will then depend on the inflation rate.
He believes that the Fed would put a pause on interest rate hikes if the inflation rate falls to 3%, cut interest rates if the inflation rate falls below 2%, and continue to raise interest rates if the inflation rate does not drop.
The consumer price inflation in the US declined to 4% in May 2023, the lowest since March 2021.
“If what I believe [no recession] is true and the fact that core inflation remains sticky, then the situation would be that the Fed [might] hike rates more aggressively in 2H2023, than what the market is expecting. That would have implications.
“In my mind, a 6% Fed funds rate is not impossible,” said Dharmo, adding that the bond market would sell off and equity markets would be volatile under the scenario.
In terms of overall market view, UOBAM Singapore head of multi asset strategy Anthony Joseph Raza said both fixed income and equities can perform in 2H2023.
“Within equities, we believe momentum in the next few months would be good. Region wise, we still like Asia but we have put a pause on China. For North Asian markets like Taiwan, we are still overweight,” Raza said.
“Bond yields are as high as I have seen in a decade. If you buy bonds, you can get 5% to 7% type returns over the next year; that looks pretty safe, with the fact that there is a global slowdown,” he said.
Dharmo, meanwhile, acknowledged that China’s valuation is relatively cheap, but there are still uncertainties that lie in the outlook of the world’s second largest economy, amid continued tension with the US.
“China is cheap relative to a lot of places from a valuation point of view, in terms of its economy still growing and monetary policy relaxing. Unfortunately, the whole tension between the US and China is dragging part of that performance,” he said.
“If that doesn't resolve, we have a structural discount on China. Ultimately, it would be too cheap to ignore but for the next six months, it's probably still uncertain.”