Valerio Baselli: Hello and welcome to Morningstar. It's been almost two years that we have been waiting for an upcoming recession, and yet the economies of developed countries have proven to be more resilient than expected. Joining me today is Steven Bell, Chief Economist EMEA at Columbia Threadneedle Investments. Mr. Bell, yesterday we saw another drop in the European PMI, the Purchasing Managers Index, which basically indicates a downturn in manufacturing output in Europe. And the situation is pretty much the same in the U.K. and in the U.S. So do you think that this much-anticipated recession will eventually be a reality in the next few months?
Steven Bell: It's a big risk in Europe. The best guess of growth is that it's barely positive, and it wouldn't take much to knock that into negative territory. The bright spot is unemployment is at a record low and still declining, which is amazing. To have a recession without a significant rise in unemployment would be very odd. I also feel that European inflation is improving, and it's improving faster than people think, and that will boost consumer confidence. And the reason that economies have been more resilient in the face of all the problems from the invasion of Ukraine and these ever-higher interest rates, is we've got all that money that governments gave us during COVID that weren't spent. So there is a possible virtuous circle of lower inflation, better confidence, better spending. But Europe is the most at risk of recession in the near term, in my opinion, of the major countries.
Baselli: All right. A couple of weeks ago, oil hit its highest level since last November. How dangerous is the oil price spike for further disinflation? And more broadly, what is your outlook for the energy markets?
Bell: So we don't like higher oil prices. They do increase headline inflation. They take spending power away. But oil is much less important than it used to be. We've made something of a transition away from this commodity. And overall, commodity prices are still lower compared with last year, compared with the peak last June. They're very much lower. So it is actually a relatively positive feature from that. And the oil price stays below $100 a barrel, and it's actually been a bit soft in the last few days. That would be fine from my point of view. So it's unwelcome, but I don't think it's a big deal. Not the big deal it used to be, and not at these prices.
Baselli: All right. And finally, let's talk a bit of equity markets. U.S. stocks have been broadly overperforming their European counterparts for quite some time now, even though this trend has weakened over the past year. What do you expect from this point of view in the short to medium term?
Bell: So we at Columbia Threadneedle Investments have become more positive on the United States a few months ago, and we are underweight European equities. And that reflects the rising interest rates and inferior economic background compared with the United States, where companies may look expensive, but they have a higher return on equity. And so to some extent, those valuations are justified. And we feel the U.S. is further down this disinflation process. We feel more optimistic about the U.S. economy and U.S. companies than we do relative to Europe. And that is our outlook for the next several months at least.
Baselli: And what about the U.K.? What is your take on U.K. equities seven years after the Brexit referendum?
Bell: Most international investors are very negative about the U.K., underweight. And I think the pessimism is really overdone. We had a big inflation problem, as many other countries did, in many ways worse than Europe, worse than the United States. But it's improving fast. A lot of the factors that pushed inflation up are now reversing and fears that interest rates would go ever higher, I think, have now receded. So I think we're going to get big interest rate cuts in the U.K. in 2024. And that will provide a much more positive background. And that's not to say everything is great. We're not over-optimistic about the U.K., but we're not negative. We think there could be a significant improvement. As confidence improves, people spend a bit more money. Mortgage rates seem to have stopped rising. So there are some significant positives here in the U.K. Brexit hasn't been a disaster. I didn't think it ever would be. And there are some positives in terms of there's an investment, strong investment cycle, and we're able to control immigration into those areas where the workforce are really scarce. So there are some positives against Brexit that I still think are negative. It's not as bad as many people thought.
Baselli: Very interesting. Many thanks to Steven Bell. For Morningstar, I'm Valerio Baselli. Thanks for watching.
