Strong likelihood of US recession in Q4 of 2022, may be prolonged but mild: Nomura

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Widespread recession

“Given the sticky inflation, despite growth slowdown and recession, the (Fed’s) rate cut will come fairly late,” said Sonal Varma, Managing Director and Chief Economist (India and Asia ex-Japan).

“Therefore, we are expecting the recession (in the US) to be fairly prolonged, but because consumer balance sheets are strong, the recession will be milder,” she added.

They are expecting recession outside of the US too, in Japan, Australia and New Zealand.

In the near term, there will be support for growth, Varma said, given that there is a catching up in services (following the pandemic slump) and reopening in tourism, which is particularly important for southeast Asia. “But, in the medium term, the export cycle is headed down. There is growing to be demand rebalancing for developed economies from services. We are expecting a slowdown in the tech cycle and with tighter financial conditions, we see more growth downside for Q4 and 2023,” she said.

Retail inflation will head higher despite commodity prices cooling off. Food inflation will catch the spillover effect from rise in global food prices, she said. “On an average, the global food prices affect food inflation with a lag of six months. So, the spillover will continue,” she said. Also, there will be price rise from local electricity prices rising, increase in cost of living and minimum wage. “Inflation is likely to be higher, particularly in the next quarter, before it starts moderating and closer to the upper band of the target,” she said.

Monetary policy across countries will continue to prioritise inflation. But, given the growth concerns in the medium term, focus will start shifting to growth next year, she said. “The terminal policy rates in this cycle will likely be lower than the more aggressive rates that the markets are pricing in right now,” she added.

Seth too, spoke about inflation as one of the two big issues that are facing the markets in the short term. “One is inflation, specifically in the US, how the Fed reacts to that inflation and how the tightening of policy will impact economic growth going forward. The second issue is China’s zero Covid strategy. Investors are concerned about that. There has been some positive news on the zero Covid strategy front over the last few days but if we see a resurgence in cases, then lockdowns may return,” he said.

“We see gradual reopening in three to six months,” he added.

Given this backdrop, he sees stock markets remaining volatile in the short term and the brokerage is cautiously optimistic in the medium term.

Also read: Looming recession need not break the back of Indian IT

What are they partial to?

In the second half of 2022, Nomura will still be in value stocks because they offer a margin of safety in a volatile stock market. They are also partial to stocks that are domestically exposed over those that are externally exposed. 

In financials, the brokerage likes banks that are domestic oriented like those in India, Indonesia and Malaysia and are cautious on banks that are in more developed parts of Asia (such as Singapore and Korea) where domestic bond yields mimic the US bond yields, Seth said.

They also like dividends, real-estate investment trusts (REITs) and strong balance sheets. They are a bit selective on commodities. “You do want some exposure (to commodities) to hedge your portfolio from inflation. But if you see a slowdown, then some of these commodities may roll over which will impact stocks as well,” he said.