MELBOURNE – An interest rate cut by the Federal Reserve later this year will be too late to boost the stocks and bonds of highly indebted companies, as funding access is already turning restrictive in the wake of the global banking turmoil, investment strategists say.
Financial conditions in the United States deteriorated to the worst since May 2020 earlier this month, following the collapse of three American lenders and Credit Suisse Group’s crisis, a key gauge shows. US banks have also reported tightening lending standards across the board in the Fed’s latest survey of senior loan officers.
“Even if the Fed cuts rates, credit spreads will widen and, more importantly, credit may not be available and make it difficult or costly for companies, including Asian companies, to roll over US dollar debts,” said Mr Redmond Wong, a strategist at Saxo Capital Markets in Hong Kong. “I would avoid financials and companies with a lot of USD debts.”
Such caution reflects growing concerns that the Fed’s gamble on using calibrated monetary tightening to contain inflation and yet avoid recession or financial instability may backfire. The latest banking crisis has amplified these worries, while Fed chair Jerome Powell has signalled more rate increases may be in store and that officials do not expect any policy reversal this year.
Financial markets, however, are doubling down on bets for a Fed rate cut, with the effective Fed funds rate now expected to drop to around 4.2 per cent in December from the current range of 4.75 per cent to 5 per cent.
JPMorgan Asset Management has trimmed exposure to high-yield debt and opted to focus on safer investment-grade corporate bonds as it anticipates a recession in the US, according to Mr Kerry Craig, a global market strategist with the firm.
In equities, the fund manager favours stocks with strong balance sheets that are insulated from higher borrowing costs and defensive sectors that can better withstand recession, specifically healthcare and utilities.
“Those are sectors that are less sensitive to the inflation and growth outlook. Also, some of the bigger mega-cap tech stocks – we are positioning in the more defensive parts of the tech market,” Mr Craig said.
Stress in the US banking sector has accelerated the tightening of lending standards, which may bring forward a recession, said Mr Chetan Seth, Asia-Pacific equity strategist at Nomura Holdings.
“It is likely that the tightening of banking sector lending standards may exert downward pressure on credit creation and therefore US economic growth in the months ahead, accelerating the path to a likely US recession,” Mr Seth said. BLOOMBERG