03 Sep 2018 5 min read

What could possibly go wrong?

By Emiel van den Heiligenberg

A US recession in 2020 is our best estimate, but this forecast is far from a slam dunk. Could it arrive later? And what might this mean for equity markets?


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The fact that a 2020 US recession is a broad-based consensus call makes us nervous about our prediction. The crowd can be right, of course, but it has the odds of history against it. If the cycle ends later than 2020, we believe that risk assets will surprise to the upside, bubbles will emerge and excessive optimism will draw people further into equities. Technology stocks are the most likely recipient of those inflows in our view, as outlined in Lars's recent blog. This is one of the more promising scenarios for equity markets.

If the US economic expansion continues into 2020, this will have been the country's longest post-war cycle. But this makes me worried: What could possibly go wrong? I have to be honest that the consensus call of the next US recession coming in 2020 seems very reasonable to us as well. Some would argue that the economic forecasts are hardwired to get things wrong and point to 'groupthink' and imperfect models that are not well-equipped for predicting shocks. The Philadelphia Fed surveys of professional forecasters shows that, as a group, economists have been able to successfully predict one of the last seven recessions!

If the cycle ends later than 2020, we believe that risk assets will surprise to the upside and bubbles will emerge 

I have far more trust in our Economics team than in the ‘average economist’. In fact, I invest most of my personal money based on their forecasts. These calls have allowed us to deliver strong performance in past years.

Why do we think a 2020 recession call makes sense?

  1. Our recession forecasting framework highlights an improved picture for the start of 2019, but it is still likely to show more warning signals as 2019 progresses
  2. Growth this year and next should be supported by meaningful fiscal stimulus. Based on current policies by 2020, this stimulus will be waning and could possibly become a headwind
  3. The Federal Reserve is moving slowly but surely towards more restrictive monetary policy. Usually this is a prerequisite of a recession

Within the team, we have been debating what it means if the consensus also expects a US recession in two years? Key for this is to assess whether recession expectations are likely to change the behaviour of economic actors, such as investors, households and corporates. That seems likely to us.

One should expect households and corporates to become more cautious on their planned consumption and investments when they anticipate tougher economic times on the horizon. All else equal, this means the recession probability for 2020 actually goes down, as the build-up of excesses, leverage and bottlenecks and the resulting pressure on costs, inflation and profits will be less present.

Emiel van den Heiligenberg

Head of Asset Allocation

Emiel is responsible for the overall strategic direction of the team’s investment and business strategy. He claims to have been a promising lightweight rower at university until French fries got the better of him. Reflecting his love for rowing in a team, he firmly believes that excellence can only be achieved by a great team made up of motivated individuals that are also eager to work together. To this end he is the self-proclaimed inventor of the verb 'teaming' to acknowledge that shaping a top team and culture of excellence is an ongoing process. Outside of work-family obligations, Emiel’s spare time is filled by a passion for shark diving and skiing. Prior to dedicating his career to portfolio management in 1996, Emiel worked as a policy adviser in the Dutch Ministry of Finance and he graduated from Tilburg University in the Netherlands ages ago. When not glued to his Bloomberg screens, this Dutch man is hooked on computer games, peanut butter and his favourite dark beer made by Belgian monks.

Emiel van den Heiligenberg