Risk of ‘monetary accident’ presents opportunity for investors

The rising danger of a “major financial accident” that causes a market capitulation later within the yr may open up alternatives for investors to “pile up on quality risk assets,” based on Beat Wittman, chairman and associate at Zurich-based Porta Advisors.

With dangers from inflation and an financial slowdown mounting and central banks treading an more and more slender financial coverage path, Wittman characterised the worldwide economic system as “stuck in a perfect storm environment of supply chain frictions, contracting final demand, high inflation, rising interest rates, falling corporate earnings and a potential financial accident.”

He stated there’s a hazard {that a} “weak link” within the monetary system breaks and investors flee en masse, offering investable bottoms for shrewd investors.

“The list of weak-links candidates is rather long and includes zombie-type European universal banks, LBO [leveraged buyout] financed corporates, over-leveraged shadow banking players and over-indebted emerging market sovereigns,” he stated in a analysis notice.

“We should not underestimate that interest rates have risen significantly in the last six to nine months and higher interest rates are eating through the economic system, and having an impact of course on business confidence, on consumer confidence, and on anyone who has a leveraged exposure to those interest rates and not enough revenue, topline or simply a cushion in terms of cash or reserves,” he instructed CNBC’s “Squawk Box Europe” on Monday.

Geographical divergences

Central banks around the globe, with some notable exceptions akin to China and Japan, have been tightening financial coverage aggressively in current months within the hope of curbing runaway inflation, prompted partly by Russia’s battle in Ukraine and surging meals and power costs.

Wittman argued that up till central banks had been compelled to start tightening this yr, financial coverage and liquidity situations had been “too loose for too long,” and policymakers, led by the U.S. Federal Reserve, had been now scrambling to revive misplaced credibility.

“There will be lagging and prolonged negative economic effects to their tightening. However, a normalization of monetary and interest rates policy is a much needed and welcome development in the long run,” he stated.

Wittman instructed CNBC that the harder the central banks discuss and act on inflation, the extra bullish he would turn into on the outlook for equities over the medium time period, however within the quick time period, September and October can be a “testing time” because the reduction rally of the final month fades.

He additionally famous the stark geographical divergences between the U.S. and Europe, with the previous extra power autonomous and much better insulated towards import and export dangers associated to the battle in Ukraine, together with the Fed main the best way on financial coverage.

“Looking into 2023 the U.S. equity market is best positioned from a geopolitical, energy security, economic resilience and monetary policy leading perspective,” he stated.

“Importantly, times of emotional, intellectual and financial dislocations and distress are the ideal breeding ground for extraordinary investment and entrepreneurial opportunities.”

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