French asset management firm BNP Paribas has trimmed its risk exposure and is battening down the hatches for the United States to potentially slip into recession over the next year.
In a notice to investors, BNP Paribas said it has also reinstated the underweight in equities and cut high-yield bonds to neutral as it adopts an overtly bearish stance in the face of global economic pressures.
Furthermore, it suggested many developed countries – not just the United States – were currently sliding towards recession. This is due to weak income growth combined with weak investor confidence and weak consumer spending.
In readjusting its approach, BNP Paribas said it had, therefore, opted to go underweight in Europe rather than the US, which it said has a ‘greater than 50%’ chance of going into recession over the next 12 months.
This is because it expects US equities to benefit from a relative safe haven stance in comparison to the panic being generated by the on-going eurozone debt crisis.
‘The growth and debt problems have left their traces on equities and other risky assets,’ said investment specialist Joost van Leenders. ‘Valuations have obviously become more attractive. But we do not see this as a compelling reason to buy equities.’
Leenders suggested analysts have only just begun to revise down profit estimates, with BNP Paribas anticipated further revisions in the near future.
Overall, despite concerns over equities, BNP Paribas expects durable goods consumption and corporate investment and inventories to remain firm in the short term.
When it came to emerging market fixed income, BNP Paribas said sound fundamentals had held the region in good stead but there were increasing downside risks especially with regards to local currency debt. However, the firm expects possible monetary policy easing in the US to benefit EM currencies against the dollar.