One of the biggest Nordic fund managers says he’s worried that credit might stop flowing across the globe if governments don’t step up their game.
Reima Rytsola, chief investment officer (CIO) at the Varma Mutual Pension Insurance Co. in Helsinki, says he can see clear signs that financial conditions have tightened despite efforts by central bankers to provide emergency liquidity.
If the world sinks into a credit crunch, it “would draw out the recession significantly”, Rytsola said in an interview on Saturday. He’s now waiting for indications, especially in the euro area, that governments are ready to add substantial fiscal stimulus, given that “the ECB (European Central Bank) is out of ammunition”.
Germany, the biggest economy in the euro area, said on Friday it might drop its long-standing balanced budget policy to help pay for measures to stem the fallout of the coronavirus.
The US has passed a bipartisan economic relief plan.
Europe has become the new epicentre of the pandemic, with governments imposing travel bans and closing borders as millions stay home to avoid contagion.
For investors, buying hedges against so-called “tail risks” might look like the “obvious answer”, Rytsola said.
But anyone adopting that strategy would already have lost money, he said.
“If you had hedged against such a market reaction through this historical bull run, you wouldn’t still be in the money with that strategy,” said Rytsola.
