Rising interest rates, inflation and geopolitical tension are the biggest risks weighing on the global financial industry, top executives of the world’s largest financial institutions told a Nov. 2 conference in Hong Kong.
"It's a painful transition but it's not an unexpected thing," James Gorman, chairman and CEO of Morgan Stanley, said on a panel discussion at the Global Financial Leaders' Investment Summit 2022, hosted by the Hong Kong Monetary Authority.
"We're materially changing the market structure that we've lived in for a very, very long time, and we've had relatively accommodative monetary policy for over a decade; almost free money," David Solomon, chairman and CEO of The Goldman Sachs Group Inc., said on the same panel.
Led by the U.S. Federal Reserve, central banks around the world, except China and Japan, have been hiking interest rates to tame rising inflation, triggered by the soaring energy and food prices following Russia’s invasion of Ukraine, which started early in 2022. Higher borrowing costs, soft loan demand and reduced deal and fundraising activity are set to continue weighing on global economic growth, as well as the earnings prospects of lenders.
The Fed is expected to raise interest rates by another 75 basis points Nov. 2, according to economists' estimates in various media reports. The hike would take the Fed funds rate to a range of 3.75% to 4%, from a range of 0% to 0.25% in March.
Rising rates, combined with inflation and very quick-tightening monetary conditions, makes the world more volatile and more uncertain, and it also allows exposures where there is leverage in the system to be amplified very quickly, Solomon said.
Liu Jin, president of Bank of China Ltd., said on the panel that a key risk is the spreading of geopolitical tensions.
The job markets in the U.S. and eurozone remain strong despite central banks' efforts to cool the employment market that has helped feed inflation, analysts said. The latest numbers suggest central bank officials are likely to continue to raise interest rates in the near future while economic growth is likely to slow further as costs of borrowing and living surge, analysts said.
In the U.S., while job growth cooled in September, the unemployment rate unexpectedly dropped and job openings rose more than the market expected, according to official data. In the eurozone, unemployment in October fell to the lowest level in two decades, while economic growth slowed sharply amid record-high inflation.
There is a feeling that central banks will get [inflation] under control and then there will be bright spots for investing, though "we're not seeing it yet," Colm Kelleher, chairman of UBS Group AG, said on the panel.
