Q4 outlook: Gathering clouds

We turn cautious on global equities on a tactical and medium-term view, as US stocks flirt with record highs even though risks to the world economy are mounting.

In our last quarterly note, we pointed out that investors faced a murky macroeconomic outlook, with a number of risks on the horizon. The outlook is now somewhat clearer – in that the risks have grown in scale.

The risks facing the global economy are tilted to the downside: our economists see a 30% chance of a global recession in the next 12 months. This is the highest probability since the start of the cycle in 2009. And yet US equities are within spitting distance of their record highs.

We are, in fact, increasingly convinced that investors are now in a ‘late cycle’ period, when the buy-on-dip strategy we have deployed over the past few years might prove less effective. As a result, we have reduced our equity stance to a slight underweight or negative position from neutral, on both a tactical and medium-term view.