Tighter monetary policy, a strong dollar and wage pressure will help tip the U.S. into recession in 2018, says Vadim Zlotnikov, chief market strategist and co-head of multiasset solutions at AllianceBernstein.
New York-based Zlotnikov’s multiasset solutions group has $115 billion in assets under management. AB manages $478 billion overall. Zlotnikov spoke in a Dec. 19 interview. Comments have been edited and condensed for clarity.
Q: What’s the global growth outlook?
A: This year was one of the weakest years for capital spending in a long time. A modest rebound will show up as a positive.
Across most of the regions, we’re seeing increases in budget deficits, which is consistent with a moderate degree of fiscal stimulus. You continue to see some improvement in small business sentiment, which is also contributing to strong growth. You have a collective desire to lift aggregate demand in the face of tight labor markets and generally that has to result in reflation, which is equivalent to stronger nominal growth.
Q: What’s the main growth driver?
A: Capital spending. The U.S. will see some of it. The latest surveys in both Japan and Europe have pointed to some optimism in the rate of capital spending. It’s not going to be that robust, but it’s going to accelerate.
Q: What’s your 2017 U.S. GDP growth outlook?
A: A 2.5%-3% real rate would not be inconceivable. However, the key point is that there’s at least 2%-2.5% inflation. What’s been priced into assets is not paucity of real growth, it’s really the paucity of pricing power. That’s what you’re going to need to meet the estimates next year.
Q: When will the U.S. see recession?
A: I think 2018. I expect the U.S. equity market could easily end 2017 below where it started, even though it could easily go up 10% to15% during the year. A combination of tighter monetary policy, a stronger dollar, high expectations and wage pressures suggest that as we go into 2018, significant gains are unlikely and markets tend to anticipate that. There’s one other thing that needs to happen in order for the 2018 recession to be likely — we actually have to see the capital spending pickup. A significant pickup in capex means cost inflation goes into 2018, and then you have a more likely scenario for the recession.
Q: Is a 2018 recession your base case?
A: If you give me the full year, then I would say yes.
Q: How much of a decrease in GDP would you expect?
A: It depends entirely on how aggressive capital spending is going into it. Consumer spending will decline in line with historical averages. You have not seen an overly aggressive buildup of debt among consumers, so I don’t think it will be a particularly severe recession.
Q: What triggers an equity selloff?
A: Recognition that expectations for 2018 are now overly aggressive and tighter monetary policy. I actually think that sometime toward the end of next year, we will see wage growth maybe approach 3.5%. If that happens, it will become really challenging for U.S. companies to generate significant profits. Starting sometime around the middle of the year, I would think about selling on strength in the U.S. For now at least, I’m buying weakness.
Q: What does the Federal Reserve do?
A: I think two to three [rate hikes in 2017], and I actually don’t think that’s going to matter. What’s going to matter is the perception as to whether the Fed’s behind the curve.
Q: Will fiscal stimulus work?
A: It’s being attempted when the labor markets are fairly tight — it’s not the normal time. Historically, the greatest efficacy of fiscal policy came when you’ve also had easing monetary policy.
Q: How do you position a U.S. portfolio?
A: You want to have exposure to areas that could become part of a long-term leadership group, which would include industrials and technology. Buy energy on weakness.
Q: What exactly in technology?
A: Cyber technology, areas involved in personalization of software and services. Almost all the personalization-oriented areas are going to do well because that’s the trend that’s going to persist for the foreseeable future. I also think there is a lift to the more boring stuff involved in building the actual infrastructure around banking systems. There, the easiest way to play it is in semiconductors.
Q: When did you overweight the sectors that you recommend?
A: Midyear, we increased financials across the world, with the biggest bets in Europe but also a significant overweight in the U.S. We were overweight [U.S.] financials until a week ago, when we went neutral. Industrials [went to overweight in] August/September. Energy’s been overweight since February.