BNP Paribas fund arm braces for ‘mother of all recessions’

The chief executive of BNP Paribas Asset Management, one of Europe’s largest investment houses, has warned of the “mother of all recessions” as the fallout from the coronavirus pandemic hits economies around the world.

Frédéric Janbon poured cold water on the idea of a swift recovery from the pandemic following “a very, very substantial drop in activities in pretty much all of the economies in the world”.*

The head of the €553bn investment house said a so-called V-shaped recovery was unlikely, instead forecasting a longer recessionary period before an uptick. “We have a view that the recovery will be more U shaped than V shaped in most countries,” he said.

He added that the rally in equity markets since a sell-off in March, when countries around the world went into lockdown, was not reflective of the underlying global economic conditions.

“The huge rally we have seen over the course of the few months from the low point in March is probably a bit fast and probably does not take into account the risk of a second wave,” he said, referring to the possibility of a further surge in Covid-19 cases globally.

He said investors — particularly smaller retail investors in the US and Europe — had been piling into the market because of “fear of missing out”, and low interest rates, which are hitting returns.

But he added that despite believing the long-term strategic outlook for economic growth was positive, “we have this view that it is time to be a bit prudent for the next few months”.

A poll last month by the CFA Institute, the association of investment management professionals, found their members were worried about several years of stagnation and a huge risk of asset mispricing as stock markets become increasingly disassociated with economic activity in the wake of the pandemic.

A survey from Bank of America this month found that only 14 per cent of fund managers expected a V shaped recovery, compared with 44 per cent predicting a U-shaped one. Three in 10 opted for a W-shaped recovered.

More than 60 per cent said the economy was in recession, while 71 per cent said the stock market was overvalued, the survey found.

Mr Janbon said BNP Paribas’s multi-asset portfolios would largely take a neutral view on equities over the coming months.

At the moment liquidity is trumping ‘fundamentals’ and valuation so it would be brave to bet against this market

“We have a bit of an overweight on emerging market equities and emerging market debt. On the rest of the market we are relatively neutral. These are tactical decisions but the long-term strategic view is still positive for most of the countries where we invest.”

In a note last week, analysts at Bernstein Research said that with the US equity market hitting a new all-time high valuation, its data suggested investors were overly bullish.

“Still, at the moment liquidity is trumping ‘fundamentals’ and valuation so it would be brave to bet against this market. Moreover, over the medium term there may be little choice for asset owners but to allocate to equities,” the analysts said.

Mr Janbon argued that while an effective vaccine “could change the picture” in terms of economic outlook, at the moment the “virus is still progressing”, particularly in the US, South America and parts of Asia.

“For the recovery to be very, very strong, we are going to [have to] have a good amount of good luck, good policy and good behaviour from the population in the respective countries,” he said.

*Mr Janbon’s name was misspelt in an earlier version of this story