While some investors believe that the Federal Reserve could steer the economy toward a soft landing, asset management giant Amundi is far less optimistic.
The $1.86 trillion global manager is predicting a recession for 2023 — and suggests tapping into fixed income to cope with the economic environment.
“This cycle is following a traditional path toward a weak economy,” said Ken Taubes, U.S. chief investment officer, at an investor event on Thursday. “The Fed has raised rates a lot. History would suggest that we’ll have a recession in the near future.”
According to Taubes, in a traditional path toward a recession, housing is usually the first area of the market to be hit. There’s already evidence of that, with demand for mortgage refinancing shrinking.
Manufacturing is usually next. And the Purchasing Managers’ Index, which is tracked by the Institute for Supply Management, showed two consecutive months of contraction in November and December of 2022. This pattern, according to Taubes, signals further economic weakness.
“The next thing is going to be that profits are going to come down quite a bit,” he said. “The last thing to go is employment, which looks very strong today. Eventually employment will weaken.”
As this path toward a recession progresses, Amundi believes that the Federal Reserve will continue to engage in quantitative tightening.
“If the Federal Reserve pulls off immaculate disinflation and somehow normalizes recovery,” then the economy will avoid recession, according to Jonathan Duensing, head of U.S. fixed income at Amundi.
So how should an investor cope?
Amundi suggests tapping into long duration, high quality fixed-income investments. According to Duensing, bonds are back in a few ways: as an actual source of fixed income and total return and as a diversifier in the portfolio.
“We see opportunities in the higher quality parts of the market,” he said. “We are more cautious about moving down the risk spectrum.”
Moving into U.S. high yield, Amundi believes that there are select opportunities, but more caution is warranted.
Instead, municipal bonds may be attractive from a long duration standpoint. The securitized market also holds opportunities, particularly in consumer lending and some areas of the catastrophe bond market.
Inflation-protected securities are another option. “From our standpoint, we think that TIPS would make sense,” Duensing said. “Real yield is positive yield. Investors probably missed that in their portfolios.”