Sebastian Raedler, head of European equity strategy at Bank of America Corp., believes that stock markets are underestimating the significant risks facing the global economy. He cites energy supply disruptions as a key factor contributing to an increasingly fragile economic outlook. Raedler highlights that investors have grown accustomed to dismissing negative news over the past four years, during which market disruptions had minimal impact on global growth momentum.
Raedler communicated on Bloomberg TV that current market sentiment suggests the macroeconomic environment is the least risky it has been in two decades, with a 90% probability that ongoing issues will not affect growth momentum. He mentioned that historical data indicates large energy shocks typically lead to demand destruction if not quickly resolved. Raedler further pointed out a sharp drop in March global purchasing managers’ indexes, which markets largely dismissed as a "little sentiment shock."
Given this backdrop, Raedler advises positioning for higher risk premiums by being underweight on cyclical stocks. He also made the recommendation to be underweight on AI-related stocks, such as semiconductors and mining companies, which are currently trading at multi-year highs relative to the broader market. He suggests that if the AI trade falters, investors should pivot to defensive sectors like consumer staples and pharmaceuticals, questioning whether AI will achieve the high margins necessary to justify its substantial capital expenditure.
Raedler’s cautious stance comes as US-Iran tensions escalate, raising concerns about potential inflation and a slowdown in economic growth. He notes that defensive positions in Europe are being overlooked by investors who believe that "nothing can possibly go wrong." He is effectively betting on a hit to growth momentum for the first time in four years, which he anticipates will lead to demand destruction.
