Financial markets are caught between inflation and recession, forcing banks to cause a slowdown, according to a recently published report by Robeco.
The report, ‘Credit Quarterly Outlook Q3 2023,’ claims that recession fears loom over the US while Germany has experienced a technical recession attributed to a decline in its industrial sector. However, the country’s low unemployment rate has shielded consumers from severe impact.
Consumer spending in the US and Europe has surged, surpassing pre-pandemic levels, leading to higher-than-anticipated inflation.
Cautious central banks, such as the Federal Reserve and the European Central Bank, are responding by gradually raising interest rates.
Nevertheless, the report warns against rapid rate hikes, particularly for leveraged companies and the real estate sector, noting that resilient assets are crucial for investors.
The report claims that market volatility persists due to uncertainty and inflation concerns but emphasises that opportunities still exist. It advises a conservative approach of buying during market downturns and selling during upswings while closely monitoring interest rates and recession risks.
Potential risks include US yields and the liability-driven investment sector in the UK. Additionally, regional US banks face challenges stemming from rate hikes and stricter lending standards.
Europe’s industrial sectors are under strain, whereas its banking industry fares better due to regulatory measures.
The report emphasises the importance of monitoring credit market sentiment and potential negative returns as central banks reduce market liquidity. It suggests focusing on high-quality, stable corporates and financial assets while exercising caution with real estate, retail and cyclical sectors.
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