After six months of navigating rising rates, rising inflation and rising geopolitical tensions, recession fears are on the rise, casting a long shadow over prospects for markets and the global economy in the second half of 2022.

Results from a recent survey of market strategists within the Natixis Investment Managers' family show that one-quarter (24%) believe recession is inevitable while another 65% see recession as a distinct possibility over the next six months.

The pressure is on for central bankers as they dig deep in their toolbox to deploy interest rate hikes and implement quantitative tightening measures to manage through a global economy grappling with the highest level of inflation in four decades. The survey, which included 34 market strategists and economists at Natixis Investment Managers and 15 of its affiliated investment managers, shows that nine in ten believe central bank policy will be the biggest market driver over the next six months.

Inflation Tops Market Risks
Key market assumptions for low rates, low inflation, and low volatility may have boosted market performance for more than a decade, but since the start of the year that unique confluence of factors has been reset. The catalyst for much of this shift has been inflation.

A knock-on effect of the conflict between supply chain disruptions and consumer demand during the pandemic, inflationary pressures increased significantly in the early months of this year as Russia waged war on Ukraine. Few of those surveyed project that pressure will be abated any time soon.

In fact, seven in ten rank inflation as the biggest market risk for H2. Given the US CPI came in at 9.1% on July 13, it's no wonder 35% of respondents go so far as to set the level of risk at 10. When it comes down to it, the strategists see energy prices (74%), food prices (62%), and wage hikes (59%) as the top three drivers of inflation.

Central banks also factor into the picture, with 53% citing policy decisions as a key inflation driver. Another 47% also believe that the supply chain issues that helped drive inflation early in the pandemic will continue to do so through year end.

But many believe there is some relief in sight, as 65% believe that while inflation will remain higher than historic norms, it will begin to moderate in H2. Less than one in four believe inflation will remain persistently high.

Top Risks for H2 2022

If not Inevitable, Recession is a Distinct Possibility
Faced with prospects for rising interest rates and tightening monetary policy, strategists place recession as a close second on the list of concerns with 65% ranking it as a top risk. Policy makers have many tools at their disposal to address inflation and, given the challenge of achieving the right timing for policy implementation, the margin for error is slim. For many, the question remains as to whether these efforts thwart inflation, trigger a recession that could last two to three quarters, or result in stagflation that lasts for years. With all the possible outcomes, no wonder more than half (56%) of those surveyed also cite a central bank error as a key risk.

Sentiment Suggests Recession in a Matter of When, Not If.

Geopolitics, War and Oil
Inflation, recession and central bank policy may factor prominently in their views on market risks, but strategists also see the potential for world events, like the war in Ukraine, as key risk considerations. In fact, 65% of those surveyed place geopolitics as a top risk, and as an offshoot, half of those surveyed (47%) see energy prices as a significant risk for markets in H2.

Europeans are already acutely aware of how that risk could play out. In June, Gazprom reduced the flow of natural gas through its Nord Stream 1 pipeline by 60% to address a technical problem. Then, on July 11, the Russian energy giant shut down the pipeline completely to perform 10 days of annual maintenance. Recognizing that half of the gas Germany needs flows through Nord Stream 1, Germans may be witnessing how Russia may use energy to retaliate to the sanctions much of the developed world has implemented since the start of the war.

To underscore the connection, oil prices spiked to $120 per barrel at the outset of the war in March, but moderated to $106 at the end of Q2.1 Looking forward, half of strategists (50%) anticipate West Texas Intermediate crude will end the year somewhere in the range of $100–$125. And while there are still 15% who believe prices will rise past the $125 mark, the larger number (32%) forecast that prices will drop to between $85 and $100 per barrel.

Projections for Oil at Year End

What a Difference a Year (or two) Makes
Of all that strategists forecast for H2, the most telling sign of the times may be how their views on Covid have changed. Where the pandemic had a dramatic impact on the global economy in 2020 and 2021, few (9%) believe Covid will present a risk in the second half of 2022, even as the highly contagious BA 2.75 is spreading globally.

Market Drivers Beyond Central Banks
While strategists point to potential central bank error which ranks as one of the biggest risks in the next six months, they also see bankers as pivotal to market performance. Nine in ten (88%) say central bank policy will be the biggest market driver in H2. But bankers alone will not determine the fate of markets.

Market Drivers to Watch for H2 2022

Almost three-quarters (71%) of strategists surveyed say they’ll be looking to corporate earnings to drive markets. Growth will be slower but still attainable in this new environment. Factset reports analyst forecasts for earnings growth of 10.6% in Q3 and 10.1% in Q4. The forward 12-month P/E ratio of 17.6 may be below the 18.6 experienced over the past five years, but it remains higher than the 16.9 achieved over the past 10.2

GDP growth will be a key driver for 65% of respondents, though achieving growth targets may be a challenge. The World Bank forecasts global growth of just 2.9% for 2022, a far cry from the 5.7% achieved in 2021 and the 4.1% forecast at the start of the year.3 Fewer see geopolitics (50%) and employment data (41%) as market drivers. Despite the looming US midterms, few (6%) believe election results will have any effect on markets. In fact, elections are given the lowest ranking by nearly six in ten (56%) of those surveyed.

Markets Stabilize, but do not Recover
A wave of volatility and uncertainty in the first half of 2022 put the Nikkei into bear territory (-21.43%). The S&P 500® managed to miss a bear market (-19.96%) by the slightest of margins. And the FTSE was down double digits at (-11.21%). But strategists do not anticipate additional losses through year end. Overall, three-quarters (74%) believe the worst pain has already been felt and say that even though markets are not likely to recover by December, they will stabilize.

Strategists say those looking for upside potential would be most likely to find it in the US (44%) and China (41%). For the US, many believe that despite July's surprise jump in inflation, it will likely moderate in the second half. For China, it may be that a shift from the zero-tolerance Covid strategy that has hindered performance so far will make its market more appealing in the second half. But now, as the country emerges from rigorous lockdown protocols, China could be ready to accelerate – so long as the Chinese population steps up consumption.

With the Fed taking an early and active role in managing inflation and attempting to stave off inflation, it’s likely that strategists see better upside potential in the US than in Europe where policy makers have a long way to go to balance out inflation and recession risks. Even fewer find an upside in Latin America (15%) or Japan (9%).

China, US Present Strongest Upside Potential

Value Continues to Shine
One of the key trends to emerge out of pandemic-driven disruptions has been the outperformance of value stocks. Low rates and low volatility had provided a rising tide in which virtually all stocks excelled over the past decade. As a result, it was harder to find underpriced stocks.

Now, with rates on the rise and volatility back in earnest, value strategies have outperformed growth. Almost six in ten (59%) believe the run will be extended for at least a few more months, while one-quarter (24%) think value will be on top for a few more years. Less than one in five (18%) think the value trend has already run its course.

Value Still has Room to Run

More to Worry about with War
Russia’s war in Ukraine was the most surprising headline of the first half of the year, and the market reaction has been swift. Now as the war grinds into its fifth month, few (15%) think it has been fully factored into the market. Should the war escalate and spread outside Ukraine’s borders, 62% believe it will cause greater disruption and would ultimately be detrimental to market performance. Conversely, one-quarter of those surveyed believe a peace accord would fuel a market rally.

Bond Markets
One of the biggest changes to the investment landscape over the first six months of 2022 has been the slow and steady increase for interest rates, with bond yields following in step. After closing out 2021 at 1.512, a series of rate hikes - including a surprise 75 basis point hike in June – put yields at 2.975 on June 30. And watched as the yield curve inversions between two-year and ten-year rates reached its biggest point in 20+ years on July 13.

Underscoring just how closely they will be watching central bank policies in the second half, 74% of those surveyed believe there will be more increases: 35% believe US Treasuries will finish the year somewhere between 3% and 3.5%. 38% anticipate even more hikes and forecast rates reaching above 3.5% by year’s end. 

Where Will 10 Year US Treasury Yields End the Year?

ECB Rates Climb out of Negative Territory
After keeping rates in negative territory since 2014, the European Central Bank is forecasting at least two rate hikes between July and September as part of its measures to curtail inflation. While ECB President Christine Lagarde has set a medium-term goal of 2.0%, few of the strategists see rates reaching that level in the second half of the year.

Instead, those surveyed are split between estimates for an ECB rate of less than 1.0% (41%) and rates in the 1.0% to 1.5% range (41%). It is surprising that among the 18% who see rates climbing above 1.5%, half (9%) are projecting they will surpass the 2% mark.

Where Will the ECB Rate End the Year?

Defaults Rise, but Stay Below Historical Averages
With rates on the rise, investors have been ready to trade rate risk for credit risk in order to boost yields. Taking the risk may be worthwhile, as the majority of strategists surveyed believe defaults will drift modestly higher (65%), but remain below historical averages. Only 12% see defaults approaching historical averages.

What it All Means
As strategists view this new fixed income landscape, there is no clear consensus on what it means for investors. Rate hikes may continue to depress bond values according to 29%, creating attractive opportunities for those who know where and how to look. In fact, another 27% say it's time to buy bonds again. Those taking the cue and starting to buy may want to consider the advice of the 24% who say that at times like these, credit quality will matter more than duration.

No Clear Consensus on Bonds

The End of an Era
Strategists see a world that has changed dramatically in the past six months. After a decade in which the easy money provided by quantitative easing, low rates, and low inflation propelled markets to positive gains in seven out of ten years, the world is moving on. This next normal is marked with greater volatility and greater uncertainty. The big question for most investors may well be: How long will it last?

About the Natixis Strategist Outlook
The Natixis Strategist Outlook is based on responses from 34 experts including 27 representatives from 15 affiliated asset managers, 3 representatives from Natixis Investment Managers, and 4 representatives from Natixis Corporate & Investment Banking.

Jack Janasiewicz, CFA®
Portfolio Manager and Portfolio Strategist
Natixis Investment Managers

Garrett Melson, CFA®
Portfolio Strategist
Natixis Investment Managers

Chris Sharpe, CFA®
Chief Investment Officer and Portfolio Manager
Natixis Investment Managers

Dirk Schumacher
Head of European Macro Research
Natixis Corporate & Investment Banking

Cyril Regnat
Head of Research Solutions
Natixis Corporate & Investment Banking

Troy Ludtka
US Economist, Cross Asset Research
Natixis Corporate & Investment Banking

Benito Berber
Chief Economist for Latin America
Natixis Corporate & Investment Banking

Michael J. Acton, CFA®
Managing Director, Head of Research
AEW Capital Management

Hans Vrensen, CFA®
MRE Managing Director and Head of Research & Strategy
AEW Europe

Kathryn M. Kaminski, PhD, CAIA
Chief Research Strategist, Portfolio Manager
AlphaSimplex Group

Alexander Healy, PhD
Chief Investment Officer and Portfolio Manager
AlphaSimplex Group

François-Xavier Chauchat
Global Economist and member of the Investment Committee
Dorval Asset Management

Jean-Charles Mériaux
Chief Investment Officer
DNCA Investments4

Isaac Chebar
Fund Manager, European Value Equity
DNCA Investments4

Carl Auffret, CFA®
Fund Manager, European Growth Equity
DNCA Investments4

Michael Buckius, CFA®
President and Chief Investment Officer
Gateway Investment Advisers

Adam Abbas
Portfolio Manager and Co-Head of Fixed Income
Harris Associates

James Grabovac, CFA®
Vice President, Investment Strategist, Municipal Fixed Income Team
Loomis, Sayles & Company

Brian P. Kennedy
Vice President, Portfolio Manager, Full Discretion Team
Loomis, Sayles & Company

Lynda L. Schweitzer, CFA®
Vice President, Portfolio Manager, Co-Team
Leader of Global Fixed Income Team
Loomis, Sayles & Company

Craig Burelle
Vice President and Senior Macro Strategies Analyst
Loomis, Sayles & Company

Elisabeth Colleran, CFA®
Vice President, Portfolio Manager,
Emerging Markets Debt Team
Loomis, Sayles & Company

Lynne Royer
Vice President, Portfolio Manager,
Co-Head of Disciplined Alpha Team
Loomis, Sayles & Company

Jens Peers, CFA®
Mirova (US)5

Amber Fairbanks, CFA®
Portfolio Manager, Global Equity
Mirova (US)5

Rafael Calvo
Managing Partner, Head of Senior Debt
and Co-Head of Origination
MV Credit

Carmine de Franco, PhD
Head of Fundamental Research

Axel Botte
Global Strategist
Ostrum Asset Management

Stéphane Déo
Head of Markets Strategy
Ostrum Asset Management

Ibrahima Kobar
Chief Investment Officer
Ostrum Asset Management

Frank Trividic
Deputy Chief Investment Officer

Nicolas Just, CFA®
Deputy CIO and CEO

Mounir Corm
Deputy Chief Executive Officer and Founding Partner
Vauban Infrastructure Partners

Chris D. Wallis, CFA®, CPA
CEO, CIO, Senior Portfolio Manager
Vaughan Nelson Investment Management

1Crude OIL.” Crude Oil - 2022 Data - 1983-2021 Historical - 2023 Forecast - Price - Quote - Chart, Trading Economics.

2 S&P 500 Earnings Season Update: May 6, 2022. FactSet.

3 World Bank. “Stagflation Risk Rises Amid Sharp Slowdown in Growth.” World Bank, World Bank Group, 7 June 2022.

4 A brand of DNCA Finance.

5 Operated in the US through Mirova US, LLC (Mirova US). Mirova US had $9.1B / €8.2B / £6.9B assets as of March 31, 2022.

The FTSE 100 Index is one of the world’s most recognized indices and accounts for 7.8% of the world’s equity market capitalization. It represents the performance of the 100 largest blue chip companies listed on the London Stock Exchange, which meet the FTSE’s size and liquidity screening. The index represents approximately 85.2% of the UK’s market and is currently used as the basis for a wealth of financial products available on the London Stock Exchange, National Stock Exchange of India and others institutions globally.

Nikkei: Short for Japan's Nikkei 225 Stock Average, the leading and most-respected index of Japanese stocks. It is a price-weighted index composed of Japan's top 225 blue-chip companies on the Tokyo Stock Exchange. The Nikkei is equivalent to the Dow Jones Industrial Average Index in the U.S. In fact, it was called the Nikkei Dow Jones Stock Average from 1975 to 1985.

S&P 500® Index is a widely recognized measure of US stock market performance. It is an unmanaged index of 500 common stocks chosen for market size, liquidity, and industry group representation, among other factors. It also measures the performance of the large-cap segment of the US equities market.

CFA® and Chartered Financial Analyst® are registered trademarks owned by the CFA Institute.

The data shown represents the opinion of those surveyed, and may change based on market and other conditions. It should not be construed as investment advice.

This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed are as of July 2022 and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted, and actual results may vary.

All investing involves risk, including the risk of loss. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.

Natixis Distribution, LLC is a limited purpose broker-dealer and the distributor of various registered investment companies for which advisory services are provided by affiliates of Natixis Investment Managers.