Two senior asset managers at a European equities conference expressed that the financial system's most significant economic threat is an ongoing credit squeeze. This topic was a central discussion point among asset managers, hedge funds, and traders gathered at the Tradetech equity trading conference in Paris.
Recent Financial Events Fuel Recession Fears
The failure of two U.S. lenders and the forced takeover of Credit Suisse in March stirred financial markets and led to a severe selloff in bank stocks. This resulted in tighter lending conditions and raised concerns about a potential global economic downturn.
IMF Cautions About Financial Turmoil Impact on Growth
The International Monetary Fund (IMF) recently revised its 2023 global growth outlook due to higher interest rates affecting economic activity. The IMF also warned that a severe escalation of financial system turmoil could cut output to near-recessionary levels.
Central Banks Raise Borrowing Costs Amid Inflation Surge
Major central banks, including the U.S. Federal Reserve and the European Central Bank, have increased borrowing costs over the past year to control an unprecedented inflation surge that has not been seen in decades.
Rising Inflation and Credit Conditions Cause Alarm
BNY Mellon's chief economist, Shamik Dhar, noted that the economy had faced multiple challenges simultaneously, with credit conditions tightening significantly in recent weeks. Dhar also emphasized the importance of accepting higher interest rates as a permanent expectation, particularly in Britain.
Bank of England and Fed Anticipate Rate Hikes
Britain's double-digit inflation in March has strengthened predictions that the Bank of England will raise interest rates again in May. Similarly, traders expect the Federal Reserve to increase rates by 25 basis points to a range of 5.00%-5.25% when announcing its next rate decision on May 3.
Implications of Tightened Credit Conditions
Dhar cautioned that the U.S. could experience a recession in the year's second half if credit conditions continue tightening. Fidelity's Romain Boscher predicted a visible slowdown in the United States and Europe but suggested a soft landing for the economy if growth in emerging markets and China remains stable.
Shift in Asset Manager Portfolio Priorities
Due to harsher economic conditions and higher interest rates, asset managers have changed their investment priorities. According to Dhar, fixed income has emerged as the preferred asset class, while Boscher believes equities remain an effective hedge compared to government bonds.