There's more than a 50% chance of a recession, and while not imminent, the $248.2 billion New York City Retirement Systems is focused on global inflation and the response of central banks worldwide to prepare, CIO Steven Meier said by email.
Higher interest rates and tighter financial conditions, he noted, have had a broad impact on the fund's portfolio from a return, risk and asset class correlation perspective.
Mr. Meier, who was appointed CIO in July 2022, further said that the likelihood of a recession may depend on the machinations of the Federal Reserve.
"The ability of the Fed to orchestrate an economic slowdown without driving the U.S. into a recession is a key question," he said. "The Fed has embarked on the most aggressive rate hiking cycle since the early 1980s, and due to the long and variable lag that monetary policy tightening has on our economy, we haven't yet seen the full impact of this policy change on the real economy."
The probability of recession, and it's timing and depth are uncertain, he cautioned.
"These scenarios range from a non-recessionary soft landing to a deep extended contraction in economic growth with negative implications for corporate earnings, debt service, tax receipts, etc.," he said. "Given the Fed's aggressive rate hikes, I believe that while not imminent, an economic slowdown is coming, with a slightly better than 50% chance of meeting the definition of a recession. I think the current inversion of the U.S. yield curve supports this expectation."
Complicating matters for the Fed, Mr. Meier said, are the continuing strong job numbers.
"The strength of the U.S. labor market is a headwind to the Fed's actions to slow the economy and tamp down inflation," he noted. "With average monthly jobs growth exceeding 300,000 per month this year, and an unemployment rate near a 50-year low, we need to assess the causes for this outcome."
Some factors behind labor market strength might include demographic trends, he added, such as baby boomer retirements, a decline in immigration, or perhaps low birth rates that are contributing to a structural shortage in labor supply.
Regardless of the reason behind the robust jobs data, he said, the "continued strength in employment is forcing the Fed to continue hiking rates and will likely result in a higher terminal rate and range of Federal Funds."
Also, given the likelihood of an expected slowdown in economic activity, corporate earnings and, ultimately, equity valuations, will decline, he said. "This will be a headwind for stocks," he added. "U.S. Treasury obligations have cheapened considerably over the past year as bond prices declined, and available yields today are at attractive levels. Cash investments are also offering attractive, low-risk short-term yields at levels not seen for well over a decade."
Private market credit opportunities, Mr. Meier added, are now more attractive due to their floating rate structure, wider credit spreads and the lenders' ability to demand stronger covenant protections.
He also favors private infrastructure strategies because many of their underlying contracts are indexed to CPI inflation and demand for high-quality properties remains strong.
As for private markets, Mr. Meier said the fund seeks diversification across its private equity, core and non-real estate, private credit and infrastructure investments, and believes the portfolios also benefit from "vintage year diversification."
As of Dec. 31, the New York City Retirement Systems had about 9.3% of its assets in private equity, 6.8% in private real estate and 2.2% in infrastructure. However, the top allocations were in public equity (45.3%) and fixed income (25%).
