A US recession is “inevitable” as long as the Federal Reserve attempts to bring inflation back to its targeted 2%, said Luke Ellis, chief executive officer of hedge fund giant Man Group Plc. Ellis expects US inflation to come down to 3.5% to 4% next year, giving the Fed an “excuse” to pause rate hikes. Still, “I think they’re going to push longer than people expect,” he said in an interview with Bloomberg Television’s Yvonne Man and David Ingles on Wednesday.
“As inflation comes down you could see them taking the foot off the brake but at some point you’re going to get a recession in the US, that’s sort of inevitable,” he said on the sidelines of the Global Financial Leaders’ Investment Summit in Hong Kong.
Ellis echoed JPMorgan Chase & Co. CEO Jamie Dimon, who said last month that “serious” headwinds were likely to push the US and world economies into recession by mid-next year. Inflation and recession concerns may cost the Democrats in next week’s midterm elections and have far-reaching implications for the rest of the world’s economic health.
Many asset portfolios have been built on wrong assumptions given investors’ lack of experience with inflation and recessions, Ellis said. These include the notion that bond holdings will hedge equities and private investments will outperform public securities, he said. People have become very complacent after a decade of the “easiest time to invest,” said Ellis, who presides over the world’s largest publicly traded hedge fund firm. Man oversaw $138.4 billion by the end of September.
Bonds and equities will correlate more closely in an inflationary environment, making the former poor hedges for the latter, Ellis said. Private investments will be hit by company bankruptcies in a recession, he added. Growing economic uncertainty and market volatility create opportunities for active asset management, Ellis said. He is seeing “some value” in the credit market but volatility will persist and default rates are set to rise.