Banking crisis makes US recession likely

Yasmine Raso

Senior Journalist, Financial Newswire

5 April 2023

The recent banking crisis spurred by the collapse of Silicon Valley Bank (SVB) and Credit Suisse takeover has accelerated the US’ path to recession, according to American Century Investments.

The US-based investment manager said investors should focus on “quality” securities and reduce risk of exposure to volatile areas such as real estate, as inflation remains likely to remain higher than the US Federal Reserve’s two per cent target.

“Tighter financial conditions and interest rates, in response to elevated inflation and banking industry turmoil, is and will continue to take a toll on consumer spending, credit creation, corporate earnings, and investor sentiment,” Victor Zhang, Chief Investment Officer at American Century Investments, said.

“The compounded effects of nine consecutive Fed rate hikes, raging inflation, supply chain disruptions and soaring interest rates will thwart growth.

“Accordingly, we believe these factors make recession the most likely economic outcome in coming months.”

Zhang also said as recession looms, US Treasury yields are likely to drop and credit spreads will widen.

“Given that outlook, investors would do well to consider increasing duration exposure in fixed income portfolios as bonds and strategies with longer durations may offer performance advantages as rates decline,” he said.

“Inflation-protection and higher credit-quality strategies appear attractive as well. As the economy gets weaker and corporate earnings deteriorate, credit selection is critical in avoiding fundamentally poor, overly recession-sensitive issuers.”

Zhang said investors have historically benefitted from focusing their portfolios on quality growth and value companies with “stable revenues, dependable earnings growth, predictable cashflow, healthy balance sheets, and manageable debt load”.

“Conversely, economically sensitive value sectors, such as financials, industrials and energy, tend to lag alongside lowered growth expectations. Additionally, commodities can lose their attractiveness when consumer and industrial demand wanes, and real estate stocks may lag as poor economic conditions and declining consumer demand weigh on property markets,” he said.

“That’s why we believe inflation-protection strategies should be core components in fixed-income allocations, even if inflation falls from current elevated levels.

“Within equities and real assets, quality will be key and will help investors safely navigate a recession.”