Investing through the noise

Roger Leaning, Director - Morgans 

The consequences of rising interest rate hikes

Market risks have escalated and serve as a reminder that ‘accidents’ do happen when central banks hike interest rates aggressively. Portfolios need a new investment playbook and need to be agile to change in this new market regime of stubborn inflation and elevated volatility.

Cracks in the financial system have appeared as the lagged effects from a rapid succession of interest rates expose some vulnerabilities. However, unlike previous episodes of financial distress, this time, regulators appear to be on the front foot responding decisively with emergency liquidity to prevent broader contagion. These measures give the troubled global banking system some breathing space, but it’s too early to say if there won’t be more casualties.

There are reasons for cautious optimism and a major banking crisis on par with the Global Financial Crisis (GFC) can be avoided. Unlike in 2007, there does not appear to be large credit losses hidden in opaque instruments on bank balance sheets. Post-GFC reforms mean that large global banks have more robust capital and liquidity buffers. Risk presents opportunity and we see a path for investors to succeed in the new regime. Investing in the energy transition, Australian/emerging market equities with a value/quality bias and investment grade credit offer the best risk/return profile for a market fretting about what is to come.

To view further market analysis and economic strategy, download a copy of Morgans’ latest Investment Watch publication ‘Autumn 2023 Outlook’ here: https://bit.ly/3NagvJe.

You can also watch Morgans’ Chief Economist Michael Knox with his latest views on the US recession: