A markedly "nasty" global recession over the short-to-medium term is likely, according to Hermes Investment Management's Eoin Murray, who believes the spread of "Japanification" - when an economy suffers a prolonged period of low growth and low inflation, mounting levels of corporate debt and pricing bubbles across asset classes could bruise developed market economies.
What's more, the chief investment officer warned a majority of developed market debt and equity assets have been outperforming global growth since the 1990s, which he said is unsustainable and will inevitably lead to a "period of readjustment".
"If you take US equities, investment grade credit, and even US Treasuries, they have beaten what is already an impressive 4.1% average growth rate anyway, and that cannot last.
"Treasuries, for instance, are assets that derive their value from the underlying economy. At some point, a period of re-adjustment will be required. And 4.1% growth is above trend historically, as it is.
The US might be able to just about sustain on-trend economic growth, but I am not sure the rest of the developed world will. Europe and Japan in particular will likely fall behind."
Indeed, Murray described the US economy as the "highlight" of developed markets at the moment given his belief the US Federal Reserve will begin to hike interest rates and reduce balance sheet debt.
Meanwhile, he said Japanese and European growth remains sluggish and monetary policy is too loose, while in the UK a no-deal Brexit is seeming increasingly likely.
Even so, the CIO warned the US is not without its problems.
"The US is arguably the highlight of developed markets at the moment. However, markets have come off of a boom from the tax cuts and the fiscal measures that Trump put in place and that gave US earnings a boost.
"That is slowly wearing off. I suspect the earnings cycle has probably peaked; earnings growth year-on-year is declining.
"If you are looking at what might trigger a rush to the door, it could only take a particularly bad earnings quarter - and suddenly sentiment gets knocked. That might be enough to push people out of the US.
"Meanwhile, Europe looks like it is in the same camp as Japan now. They have not been able to raise rates or take the liquidity punchbowl away.
"The Fed has made a valiant run at it, but it has never quite reached velocity. I think The Fed would love to continue that trajectory of at least a couple more rate rises, but they may be running out of time."
He added: "A lot of weight has been pinned on the fact the Fed will do a U-turn in its policy implementation, which I just do not think is going to happen. That was baked into markets during Q1 this year.
"If you combine this with the piling up of corporate debt, which has been encouraged across developed markets by ultra-low interest rates, then there is a case for a particularly nasty recession to be on the cards."
Emerging market assets
Contrary to popular belief, according to the CIO, emerging market assets rather than developed market should offer better downside protection from such an event.
"Historically, most people will have probably said emerging markets would be the last place you would want to go given where we are in the market cycle.
"However, in a more immediate sense, should any dollar weakness arise from a recession then emerging markets would benefit," Murray reasoned.
"More generally speaking, I actually think the region is a lot more resilient now to global economic shocks than it has been historically.
"There are pockets of Asia that will continue to feed economic growth over the long term, and I actually think some of the emerging markets could be quite attractive places to invest."
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