Mark Harries, Square Mile’s chief investment officer, has warned there are likely to be corporate casualties caused by the Bank of England’s rate hiking cycle.
In his latest investment outlook, Harries (pictured) said the ‘fairly blunt tool’ of base rate rises is making life increasingly expensive for companies as well as individuals.
“As such, there may be further corporate casualties to come, especially for the more indebted parts of the market such as commercial property, meaning that the risk of recession lingers,” he said.
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The financial pain from borrowing costs is not being spread evenly, as some sectors run on higher debt levels than others. In Harries’ view, commercial property is particularly vulnerable in this regard.
“The full impact of high rates on consumers is still unclear,” Harries noted in the update. “Savings made during the pandemic, coupled with higher wages may offset some inflationary effects, but these saving are being drawn upon and the delayed impact of higher mortgage rates could yet to have been fully felt.”
“This will be very important for the global economy and corporate earnings in the quarters to come.”
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Harries sees the overall macro situation as a case of a ‘recession delayed rather than avoided’.
Equity markets have generally performed well year to date, Harries noted, with Japan posting the strongest returns due to a weak yen.
The US has also performed well, although this has been driven by a narrow field of mega-tech stocks and ‘AI mania,’ he noted.
“After a dismal 2022, global bond markets have posted positive returns despite US Treasuries experiencing volatility in the wake of the regional banking crisis,” Harries added. “In the UK, gilts fell against a backdrop of disappointing inflation data and the likelihood of further interest rate hikes.”
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