Gerald Minack warns ‘global recession on the cards’

For prominent bear Gerard Minack, now is not the time to be embracing risk.

Prominent bear Gerard Minack doesn’t see China as a big risk.

The sharemarket volatility of recent weeks is testing even the most resilient investors. But for prominent bear Gerard Minack, now is not the time to be embracing risk.

He believes a global recession is coming, and central banks have no ammo left to fight it.

“On a one- or two-year view, I think a global recession is on the cards,” he says.

“And it’s not so much the thought of recession that’s scary, but that there’s almost no policy tools left to respond to such an event,” says the former head of developed market strategy at Morgan Stanley. “Monetary policy is exhausted, and although fiscal policy works, you’re relying on the knuckleheads running Congress to see sense, or you’re relying on Europe to get its fiscal house in order, both of which look quite unlikely.

“So you’re facing a downturn with very few policy tools left to respond to it and an equity market that even after the recent correction looks fairly expensive.”

Minack, who left Morgan Stanley in 2013 to set up his own consultancy, Minack Advisors, thinks we’re heading into a “disinflationary bust” and says while he’s not “mega-bearish” on 2016, the prospect of skinny returns doesn’t justify the risk of hanging around in asset markets.

“What’s been appropriate over the past few years is to have your money in various markets because the risks weren’t that great and the subsequent returns were fairly respectable. That calculation’s swapped right around and it’s time to be more defensive, in my view.”

Bonds and cash are where investors should be looking to park their money in the present environment, as part of a balanced portfolio.

“After three or four years where cash was trash, this is the year where cash is going to be king,” he says.

“Bonds seem to me to be the best option, on a two- or three-year view. But this is in the context of ‘I don’t have any options for what will make people rich’, I’m just looking for options that will try and make them get poorer at a slower rate.”

The biggest risks facing the global economy are the markets themselves and the tightening in financial conditions.

“When credit markets start to flag recession risks that’s a much bigger worry because credit markets can make their own forecasts more likely. With interest rates as they are, corporates have levered up in the past few years, so it becomes an almost self-fulfilling prophecy.

“In the current market it’s not so self-fulfilling yet, but I’d certainly thump the table and say it’s the most likely outcome.

“The second risk is the tightening in financial conditions we’ve seen, not just in the US but globally, and although we’ve got the easing by the BoJ and ECB I don’t think that matters at all. We live in a dollar-denominated financial system and when the US dollar goes up it turns the screws on the world, and that’s exactly what we’ve been seeing.”

Minack doesn’t see China as a big risk, saying Beijing will do “whatever it takes” to ensure it doesn’t “blow up”, but the tumbling oil price is increasing the risk of a global recession.

“It’s critical that the oil price finds a low fairly soon because the falling price is driving the (US) dollar up. And if the dollar keeps on rising, the risks of global recession will increase because it will tighten global financial conditions.”

While he says a recession is on the cards for Australia, Minack is not telling clients to position for one just yet.

“I would really need to see the leading indicators soften. They are starting to moderate at the margins, but they’re not particularly alarming yet.

“But in the second half of the year we’re going to have to face up to ongoing declines in mining capex, the wind down in the domestic car industry, and the housing boost diminishing.

“There are plenty of risks out there and we’re continuing to struggle with what was a once-in-a-century commodity boom.”