According to Beat Wittman, chairman and partner of Zurich-based Porta Advisors, the likelihood that a “major financial accident” could result in a market surrender later in the year is rising, which may provide opportunities for investors to “pile up on quality risk assets.”
Wittman described the state of the world economy as having rising risks of inflation and a recession in the economy, with central banks following an increasingly constrained monetary policy course. “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.”
According to him, there is a chance that a “weak link” in the financial system may fail and cause a wave of investor exodus, opening up opportunities for savvy investors to buy at bargain prices.
“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 wrote that in a research note.
“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,”on Monday, he said on “Squawk Box Europe” on CNBC.
With major exceptions like China and Japan, central banks throughout the world have aggressively tightened monetary policy in recent months in an effort to slow the rate of inflation, which has been stoked in part by the Russian military conflict in Ukraine and rising food and energy costs.
According to Wittman, monetary policy and liquidity conditions had been “too loose for too long” before central banks were compelled to start tightening this year. As a result, officials, including the U.S. Federal Reserve, are now attempting to regain lost 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 said.
As the relief rally of the previous month fades, Wittman told CNBC that the more forcefully central banks talk about and take action to combat inflation, the more optimistic he would become about the outlook for equities over the medium term. However, in the short term, September and October will be a “testing time.”
He also pointed out how starkly different the U.S. and Europe are geographically, with the former being more energy independent and far more protected against import along with the Fed setting the standard for monetary policy.
“Looking into 2023 the U.S. equity market is best positioned from a geopolitical, energy security, economic resilience and monetary policy leading perspective,” he said.
“Importantly, times of emotional, intellectual and financial dislocations and distress are the ideal breeding ground for extraordinary investment and entrepreneurial opportunities.”