According to Beat Wittman, president and partner at Zurich-based Porta Advisors, the growing risk of a “major financial crash” triggering market speculation later this year could open the door for investors “accumulate quality risk assets”.
With risks from inflation and recession increasing and central banks following an increasingly narrow monetary policy path, Wittman described the global economy as “stuck in a stormy environment”. the perfect combination of supply chain frictions, reduced final demand, high inflation, rising interest rates, falling corporate earnings and a potential financial crash.”
He said there was a risk of a “weak link” in the financial system breaking and investors fleeing in droves, creating an investable bottom for savvy investors.
“The list of weak link candidates is quite long and includes zombie-style global banks in Europe, LBO [leveraged buyout] well-funded companies, shadow banking firms that are heavily leveraged, and emerging market sovereigns too heavily indebted,” he said in a research note.
“We should not underestimate that interest rates have risen significantly in the last six to nine months and that higher interest rates are affecting the economic system and having an impact of course on business confidence, consumer confidence. consumers and anyone with leverage, he told CNBC on “Squawk Box Europe” on Monday.
Geographic divergence
Central banks around the world, with some notable exceptions like China and Japan, have tightened monetary policy aggressively in recent months in hopes of curbing runaway inflation, in part. due to Russia’s war in Ukraine and rising food and energy prices.
Wittman argues that until central banks are forced to start tightening this year, monetary policy and liquidity conditions have been “too loose for too long”, and policymakers , led by the US Federal Reserve, is now trying to restore lost credibility.
“There will be lingering and lagging negative economic effects on their tightening,” he said. However, the normalization of monetary policy and interest rates is a much needed and welcome development in the long run.”
Wittman told CNBC that the harder central banks talk and act on inflation, the more optimistic he will be about the medium-term stock outlook, but in the short-term, September and October will is the “time of testing” to relieve. last month’s rally fades away.
He also noted the stark geographical differences between the US and Europe, with the former being more energy self-sufficient and better insulated from import and export risks associated with the war in Ukraine, and with the Fed leading on monetary policy.
“Looking at 2023, the US stock market is best positioned from the standpoint of geopolitics, energy security, economic resilience, and monetary policy,” he said.
“Importantly, times of emotional, intellectual and financial distress are ideal breeding grounds for extraordinary business and investment opportunities.”
