Second, banks are likely to pull back from lending in response to higher funding costs (as deposits continue migrating to money market mutual funds in search of higher returns) and more prudent balance sheet management (in response to rising delinquencies and defaults).
This is likely to be particularly true for regional banks, which play an outsized role in providing roughly 40 per cent of all loans to the US economy and approximately 70 per cent of loans to the commercial real estate market.
Foggy bottom
Central banks may have arrested a fast-moving financial panic, but are unlikely to do much to avert the slow-moving credit crunch that is now well underway.
To a large extent, this is a credit crunch of their own making. With an eye to longer-term structural shifts, they are unlikely to turn back on their goal of right-sizing demand to match the supply potential of the economy.
As we look to the end of 2023, there continues to be a wide range of positive and negative potential outcomes.
On the downside, negative momentum in the economy could lead to a more intense credit crunch.
Inflation could also remain resilient. Mark-ups continue to surprise on the upside as global businesses seem to be successfully pursuing price over volume strategies.
On the upside, the downward momentum in prices could intensify, providing a much-needed reprieve for central banks. A cut in US interest rates could lead to a huge sigh of relief across the world and breathe fresh life into financial markets.
With such a wide array of outcomes still plausible, investors should be prepared for continued turbulence in the coming months.
Multiverse-jumping and shape-shifting are likely to be with us for just a while longer as we ride out the current cycle.
Against this backdrop, we believe in assuming a lower risk appetite until we have clarity on how deep any credit crunch turns out to be.
We prefer credit exposure over equities, and favour more liquid alternatives that hedge against extreme outcomes, in particular gold, and commodities that are critical to the decarbonisation agenda.
Subitha Subramaniam is head of asset management at Sarasin and Partners
