Risk of ‘monetary mishap’ provides chance for financiers

Risk of 'financial accident' presents opportunity for investors

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The growing danger of a “major financial accident” that triggers a market capitulation later on in the year might open chances for financiers to “pile up on quality risk assets,” according to Beat Wittman, chairman and partner at Zurich- based Porta Advisors.

With dangers from inflation and a financial downturn installing and reserve banks treading a significantly narrow financial policy course, Wittman identified the worldwide economy 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 is a threat that a “weak link” in the monetary system breaks and financiers leave en masse, supplying investable bottoms for wise financiers.

“The list of weak-links prospects is rather long and consists of zombie-type European universal banks, LBO [leveraged buyout] funded corporates, over-leveraged shadow banking gamers and over-indebted emerging market sovereigns,” he stated in a research study 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,” he informed CNBC’s “Squawk Box Europe” on Monday.

Geographical divergences

Central banks around the globe, with some noteworthy exceptions such as China and Japan, have actually been tightening up financial policy strongly in current months in the hope of suppressing runaway inflation, triggered in part by Russia’s war in Ukraine and rising food and energy rates.

Wittman argued that up till reserve banks were required to start tightening this year, financial policy and liquidity conditions had actually been “too loose for too long,” and policymakers, led by the U.S. Federal Reserve, were now rushing to bring back lost reliability.

“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 informed CNBC that the harder the reserve banks talk and act upon inflation, the more bullish he would end up being on the outlook for equities over the medium term, however in the short-term, September and October will be a “testing time” as the relief rally of the last month fades.

He likewise kept in mind the plain geographical divergences in between the U.S. and Europe, with the previous more energy self-governing and far much better insulated versus import and export dangers connected to the war in Ukraine, in addition to the Fed blazing a trail on financial 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 stated.

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