Experts Debate Whether or Not a Recession in Europe Is Imminent at World Economic Forum

The World Economic Forum is currently underway in Davos, Switzerland. At a panel titled “Global Economic Outlook,” leaders from around the world debated whether or not the world is headed for an economic downturn. Panelists included Geoff Cutmore, anchor at CNBC, Kristalina Georgieva, managing director of the International Monetary Fund, Jane Fraser, CEO of Citigroup, François Villeroy de Galhau, governor of the Bank of France, and David Rubenstein, co-chairman of the Carlyle Group.

Fraser, who accurately forecasted this winter’s market slowdown in October 2021, said that she believes Europe will see a recession, but that the rest of the world will be more resilient.

“Europe is right in the middle of the storms from supply chains and the energy crisis, and there is proximity to some of the atrocities that are occurring in Ukraine,” said Fraser.

However, Villeroy de Galhau was more skeptical.

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“We all knew that this war was going to mean less growth and more inflation. But now we know a bit more about the effects in Europe. If you look at IMF forecasts for Europe’s growth, it’s still significantly positive.”

Nevertheless, Villeroy de Galhau remains concerned about inflation, and has promised that the French central bank will get ahead of it.

The big movement in corporate defined benefit plans has been de-risking, shifting into bonds from riskier equities. But that has brought an added benefit: Their investment fees have gone down.

Reason: That transition, under the auspices of liability-driven investing, is mainly into passive funds, which of course are cheaper than active stock strategies, according to a report from research firm Investment Metrics. These days, the corporate DB fixed-income portfolios are 55% passive, versus 20% three years ago, the study finds.

And for long-term bonds, which make up the bulk of the plans’ fixed-income holdings, that has led to median fee reductions of .025 percentage point. The spread between highest and lowest fees for the longer paper was 0.28 point. As the study points out, “there is greater passive pressure in this mandate which could contribute to greater fee pressure.”

Plans “don’t want to pay higher fees,” says Brendan Cooper, senior consultant in the research and market intelligence group at the firm.

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Reflecting their larger presence in portfolios, the long-term bonds were larger in size, on average $100 million. The intermediate and long bonds also had a bunch of unconstrained funds, mainly those covering multiple sectors.

While a majority (more than 80%) of intermediate and long bonds outpaced their benchmark, they did so by less than one point at the median level. At the same time, over 95% of short-term bonds did better than their benchmark, by a median 1.5 points.

The study covered 147 managers. It compares actually negotiated fees, rather than listed or published fees, for different plan types, mandate sizes and asset classes.

To be sure, pension plans tend to prefer longer-term bonds as they best match up with their obligations to beneficiaries over time. Although bond prices are taking a pasting lately, these investments likely will stick around in the portfolios until they mature.