A portfolio manager at a $21 billion firm warns the odds of a recession have risen to 40% from 20% as inflation and geopolitical concerns surge — and shares where he’s investing

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After a blowout September jobs report, market confidence in the US economy heightened. Goldman Sachs’ chief economist Jan Hatzius lowered his recession odds from 20% to 15%, for example, citing low unemployment and strong GDP growth.

Not everyone agrees with the top investment bank and market consensus, though.

Zehrid Osmani, a portfolio manager at the $21 billion investment manager Martin Currie, has actually increased his recession odds. Currie now sees the likelihood of a downturn at 35%-40%, up from 20%-25%.

Although a recession isn’t Osmani’s base scenario, his biggest concerns are persistent inflation and increasing geopolitical tensions.

First, inflation hasn’t fully cooled, which could hamper the schedule of the Federal Reserve’s rate cuts.

Indeed, the latest CPI report hints that the inflation battle hasn’t been decisively won, with prices rising 2.4% in the last 12 months through September, slightly above the 2.3% that economists were predicting.

Osmani is keeping his eye out for one specific area: wage inflation.

“The vast majority of inflation comes from wage inflation in the medium term, and if you look at wage inflation, it remains somewhat elevated,” Osmani said.

The inflation problem isn’t just confined to the US, either. It’s an issue that has ramifications for the global economy. “You’re looking at 4% to 5% inflation both in Europe and the US, closer to 6% in the UK,” Osmani said.

Geopolitical conflict is contributing to elevated inflation as well. The Russia-Ukraine war has complicated global supply chains, impacting food and energy prices. The escalating Israel-Hamas conflict has led to higher ocean shipping costs.

Technology — specifically AI development — is also fueling geopolitical tensions. Osmani believes AI will increasingly become critical to corporate competitiveness, resulting in increased technological conflict. And with AI shaping up to be a trillion-dollar industry in the next decade, the stakes are high.

US-China tensions are escalating over Taiwan, home to the world’s largest semiconductor foundry, Taiwan Semiconductor Manufacturing Company. Taiwan produces over 90% of the world’s most cutting-edge semiconductors, making it an important interest for any country or company looking to stay ahead in the AI race.

In this environment, heightened uncertainty caused by these geopolitical tensions will continue to send shock waves through the market, according to Osmani. He expects the market to remain volatile for the near future.

Lastly, leading indicators, especially manufacturing indicators, have been lukewarm, Osmani said.

Manufacturing in the US has been on a steady decline. The sector contracted in September for the sixth month in a row, with an ISM manufacturing index reading of 47.2. A value below 50 indicates a pullback in manufacturing activity.

With the Manufacturing ISM hovering at or below 50 for almost the last two years, Osmani sees a heightened risk for recession.

Where to invest

Investors shouldn’t panic at the possibility of a recession, according to Osmani.

“If there were to be a recession, we think it would be shallow and short-lived,” Osmani said. “If you look at the balance sheets of the private sector, both corporates and households, they remain very solid.”

The companies best-equipped to deal with this period of economic uncertainty are ones with resilient earnings growth, solid balance sheets, and exposure to long-term structural growth themes in the areas of energy transition, aging population, and AI, according to Osmani.

Osmani sees what he calls “seismic thematic shifts” in these areas. With over 16% of the world population reaching 65 or older by 2050, an aging population will drive demand for more robust healthcare infrastructure. Semiconductors powering the AI revolution will remain critical as the technology advances, and the industry has successfully monetized upon surging AI demand thus far. And Osmani sees potential for parts of the market driving the energy transition, such as alternative energy and electric vehicles.

His top picks include Nvidia (NVDA), Microsoft (MSFT), chemical company Linde plc (LIN), and industrial manufacturing company Atlas Copco (ATLKY). They are all constituents of the Martin Currie Global Portfolio Trust.