US recession would last 11 months
The US is not in recession yet, but this is not the time to invest, warns BlackRock head of asset allocation David Hudson.
“The data doesn’t support the US being in recession at present,” he said.
“If the US avoids a recession then it is the time to buy equities, but I don’t think that is right.”
If the US goes into recession it would last about 11 months, based on BlackRock research into downturns during the last 40 years. The longest recessions during that period were the ones in 1973-5 and 1981-2.
Based on the assumption that a recession would start in the next few months, Hudson said the time to buy shares would be early next year.
“On average, the market falls by 33 per cent, and this market has only fallen 17 per cent till the end of January,” he said.
“It is looking like we will have a shallow recession and the bear market usually returns about two months before the end of the recession.”
This would mean the buying opportunities could be as early as March this year if the investor believes it will be a shallow recession lasting less than six months.
The last time such a recession occurred was in 1980, when the market fell 17 per cent and it was only four months between the end of the bear market and the recession. The bear market lasted exactly one month.
“If it turns out to be a deep recession, then we are talking about a totally different type of market,” Hudson said.
“But I don’t think this is going to be likely.”
Historically, if the US goes into recession Australia follows, but Hudson argues the Australian economy has recently decoupled from the US.
“Australia has decoupled from the US economy twice in this decade,” he said.
“It decoupled in 2001-2 when the US was hit by the tech crash and Australia wasn’t and the two economies are moving apart now.”
Economic growth in Australia was above 4 per cent at the end of 2007 whereas the US was heading for 2 per cent.
“The Australian economy is performing well and the rise in resources prices is important for us,” he said.
“This means China is critical for the Australian economy.”
Australia’s terms of trade, the index that reflects commodity prices, has risen from 75 per cent in 1981 to just below 110 per cent during 2007.
“Our terms of trade are the highest in 50 years,” Hudson said.
“China is the number one consumer of base metals and that makes it a big driver for our economy.”
He said the Reserve Bank of Australia (RBA) is trying to control the Australian economy through rate rises because it is growing so quickly.
“The RBA thinks the Chinese boom is going to continue and that is why it is raising rates,” he said.
“The RBA thinks there is an inflation problem and that it is coupled with a resources boom.”
Hudson believes this creates a greater risk of recession in Australia due to the rate rises cutting growth.
“But if the Chinese boom continues, then I think we will be fine,” he said.
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