© Reuters. FILE PHOTO: The logo of Credit Suisse is pictured in front of the Swiss Parliament Building, in Bern, Switzerland, March 19, 2023. REUTERS/Denis Balibouse/File Photo
By Nell Mackenzie
PARIS (Reuters) – The biggest threat to the economic outlook is a credit squeeze that has not finished filtering through the financial system, a senior official at Fidelity International told a European equities conference on Wednesday.
For asset managers, hedge funds and traders gathered in Paris for the Tradetech equity trading conference, recession risks were a key talking point.
The failure of two U.S. lenders and the forced takeover of Credit Suisse roiled financial markets in March, and a sharp selloff in bank stocks tightened lending conditions further, raising concerns about a global downturn.
The “biggest threat” to the economy is a “true and visible credit crunch”, Romain Boscher, non-executive director, and former equities CIO at Fidelity International, which has over $660 billion in total client assets under management, told the conference.
The International Monetary Fund last week trimmed its 2023 global growth outlook as higher interest rates cool activity but warned a severe flare-up of financial system turmoil could slash output to near recessionary levels.
Major central banks such as the U.S. Federal Reserve and European Central Bank have ramped up borrowing costs over the past year to curb an inflation surge not seen in decades.Between them, central banks in the developed world have hiked rates by over 3,000 basis points in this tightening cycle.
“The economy has been assailed by lots of things at the same time. We have seen credit conditions tighten dramatically in the past month or so,” said Shamik Dhar, chief economist at BNY Mellon (NYSE:) Investment Management and a former Bank of England (BoE) official.
An added danger, said Dhar, was any remaining question, particularly in Britain, that inflation might be transitory. Higher rates should be a permanent expectation, he said.
Britain was the only country in western Europe with double-digit inflation in March, data showed on Wednesday, bolstering bets the BoE will raise rates again in May.
The Fed too is expected by traders to lift rates by 25 basis points (bps) to a range of 5.00%-5.25% when it unveils its next rate decision on May 3.
“The Fed was too slow to move. The transitory story went on for way to long. What the Fed has done since is to catch up – and catch up pretty effectively,” said Dhar.
Dhar said if credit conditions tightened enough, the U.S. would slip into a recession in the second half of the year.
Fidelity’s Boscher said there would be a visible slowdown in the United States and Europe, with a soft landing for the economy possible if growth in emerging markets and China holds up.
Harsher economic conditions and higher rates have changed priorities for asset manager portfolios, both said.
Fixed income has become the asset class of choice, said Dhar.
Having surged over 200 bps last year as inflation and rates rose, the has slipped 20 bps this year as traders position for a weaker outlook.
Equities are still an effective hedge, said Boscher, at least compared with government bonds.
(This story has been officially corrected to say ‘Fidelity International’, instead of ‘asset managers’, in paragraph 1)
Fidelity International has recently suggested that a credit squeeze could potentially be one of the biggest threats currently facing global economic and market outlook.
In its latest quarterly Global Outlook, the investment firm warned it would be an uphill battle for economies to tap into the credit markets following the coronavirus pandemic.
The UK-based company said the crisis posed a significant threat to economic success for the year, saying it was important for governments to continue providing support for businesses and households.
The article said ongoing central bank intervention was essential to keep credit markets functioning as well as providing enough liquidity in the market.
It also stated that it was essential for central banks to keep up their support of key areas, particularly government bond markets, while ensuring they remained attractive to global investors.
Fidelity also pointed to the impact of the US election and Brexit on the potential performance of markets in 2021, saying they could be major factors in determining global growth.
The company highlighted the importance of governments’ support in areas such as aiding workers and businesses affected by the pandemic, saying that this could be key in enabling a swift recovery.
Overall, it believes there is some positive outlook for markets in the coming year, however, it believes there will still be an uphill struggle for economies in bouncing back from the shock of the coronavirus pandemic.