The end of the easy cash era is over and its impact has yet to be felt on global markets. Hopefully, the pain of harsh interest rate hikes and high inflation has passed.
The central banks of the United States and the United Kingdom are further loosening their stimulus measures by shedding their bond holdings. and the European Central Bank will also participate. recentlyNomura estimates the three banks’ balance sheets will shrink by $3 trillion this year.
Tech stocks and crypto currencies look risky They are among the riskier assets on the rise as cash has been pumped out by central banks to combat weak inflation in recent years.
Guy Miller, Chief Market Strategist at Zurich Insurance Group, said: “When you’re unprecedentedly financially rigorous, you can’t afford to lose. Chances are you get an undisclosed problem. This could be something hidden, like liquidity, or something more obvious, like pressures in the housing market.”
We consider potential pressure points.
1/ Darling, not much
Once was the darling of the easy cash era. Technology stocks are being shunned by many investors even after January’s price bounce. Because of higher interest rates, it’s more expensive to bet on potential revenue growth in a startup or speculative business.
when economic uncertainty is high Investors are always looking for reliable returns from dividends to protect their portfolios. That makes the likes of such tech stalwarts. apple (OHEC)The stock, which trades at a dividend yield of less than 1%, looks vulnerable.
James Harries, senior fund manager at Troy Asset Management, said: “We are at a stage where very high valuations in the market conflict with much less supportive policies, “so the trend is dimming.”
Tech companies are making a comeback in the pandemic era. Laid off after years of hiring, Alphabet’s Google owner plans to ax 12,000 workers; MicrosoftAmazon and Meta are shooting nearly 40,000.
2/ Initial risk
Concerns about corporate defaults are growing as rates rise. Although recession concerns have eased
S&P Global said Europe had the second highest number of defaults last year since 2009.
US and European default rates are expected to reach 3.75% and 3.25% respectively in September 2023, compared with 1.6% and 1.4% a year earlier, with pessimistic forecasts of 6.0% and 5.5%. which is not “impossible”
Man GLG’s portfolio manager, Michael Scott, said the market had not yet fully priced in on the heightened risk of default.
3/ go private
The private bond market has skyrocketed since the financial crisis to $1.4 trillion from $250 billion in 2010.
The nature of the floating interest rate mainly attracts investors. which can reap high single-digit or low double-digit returns. It became popular as interest rates fell after 2008, supporting risky assets.
now reality check: Higher rates imply heavier burdens for companies. While the recession was creeping in. obscures the ability to generate enough cash to pay for increased interest costs
“What amazes me is that you’re almost back to complacency,” said Will Nicole, CIO of Private and Alternative Assets at M&G Investments. Upcoming loans for the first time in decades And now people seem to have forgotten about it.”
4/Winter CRYPTO
Rising borrowing costs have shaken the crypto market in 2022. The price of bitcoin has dropped 64% and about $1.3 trillion has been wiped from the market value. cryptocurrency around the world
Bitcoin has been on the rise lately, but caution remains. The collapse of several prominent crypto companies especially FTXThis leaves investors to bear large losses and demand more control.
January brought with it a new wave of job cuts as companies prepare for the so-called crypto winter, while Genesis lending unit recently applied. US bankruptcy protectionowe creditors at least $3.4 billion
5/sell
The real estate market is the first responder to interest rate hikes. Began to crack last year and 2023 will face difficulties. Because house prices in the United States are expected to 12% down.
Fund Manager Survey by BofA View China’s troubled real estate sector It is the second source of credit events.
European real estate is reporting levels of misery not seen since 2012, according to law firm Weil, Gotshal & Manges.
How the debt services sector is in the spotlight And officials have warned banks in Europe of risking big profits by sliding house prices.
Real estate investment management company AEW estimates the UK, France and Germany could face a 24 billion euro debt funding gap until 2025. Fortunately, banks’ balance sheets are better positioned to absorb losses. Therefore, few cases are expected to repeat themselves in 2008.
