Our View

Recession worries on the rise

Dr. Felix Brill · Dr. Thomas Gitzel · Bernhard Allgäuer · Harald Brandl
Reading time: 9 Min
Rising prices, new supply problems and a war in Ukraine. No wonder confidence among companies and consumers is sinking rapidly. The risks of recession are increasing, the warning lights have jumped to red. This speaks for a defensive portfolio orientation.

Russia and Ukraine both have only a small share of the world economy in their own right. As terrible as the war is and as much as it calls into question security policy since the fall of the Iron Curtain, the direct economic con-sequences would hardly be worth mentioning. But, and this is a big "but": the indirect effects are huge. It starts with energy prices, goes on to small but important elements in the industrial supply chains and ends with the agricultural market.

The price of a barrel of crude oil is still higher than before the Russian invasion and significantly higher than a year ago. This is fuelling the already high inflation in the short term. Yet consumers are already reacting to the drastic increase in inflation. Both in the USA and in Europe, consumer sentiment has deteriorated significantly. The main reason for this is a worsening assessment of both the economic situation and the consumer's own financial situation. As a result, private consumption as a pillar of the economy is likely to weaken for the time being.

But the fact that a recession is now looming is due to the companies. Their assessment of the economic outlook is also much worse. Higher commodity prices are squeezing margins and supply shortages are getting bigger, not smaller. This reduces the willingness to invest, which is so important for the economic cycle.

Due to the recession risk, we are confirming our defensive stance in the equity bucket of the portfolio. In addition, we are reducing the strong underweight in government bonds and close the position in Chinese bonds.