The word “crisis” has been used as a term for political and economic events throughout history. Agreed, sometimes it is appropriate, but particularly with media influence it now feels as though the world simply lurches from one “crisis” to the next and we live in an era where the word “crisis” is utilised wherever possible. As of yesterday (15/03/2023) the banks are the latest to be subjected to the “crisis” treatment.
Everybody is familiar with the 2008 Global Financial Crisis (GFC), however, there is currently no evidence to suggest that we will get a repeat of 2008 anytime soon. In 2023, banks are well-capitalised in comparison to 2008, which makes the financial system more resilient to such episodes.
In the US, the failed Signature and Silicon Valley Banks had issues which applied explicitly to them. That said, US community banks have less protective legislation and restrictions than their European counterparts. In Europe, the embattled Credit Suisse bank had already been going through two years of problems and significant restructuring. The US and Swiss authorities are both taking appropriate action to ringfence the banks involved in the current wave of panic, and at the time of writing (16/03/2023), the Credit Suisse share price has rebounded by circa 20%. In our opinion, Credit Suisse has no reason to fail, and it remains well-capitalised, furthermore, we don’t believe the authorities would allow it to fail either.
What we do expect is markets to remain volatile, and the central banks will have a lot of work to do balancing things like inflation risks with the effects of their higher rates. However, this same volatility produces opportunities and once again highlights the need for well-diversified investments, versus relying solely on specific asset classes or geographies. We have maintained for some time that the investments which produced the most attractive returns in the super low-interest era will not be the winners in this more inflationary, and higher rate, environment we find ourselves in today.
Recession risk has been discussed at length in mainstream media outlets and within the financial sector in recent months, and with the US Federal Reserve now likely to proceed more cautiously, it could well be argued that a recession risk has finally diminished.
Outside of the more extreme short-term market movements, February into early March had been largely positive for equity investors, albeit with increased volatility. Equity markets were moderately positive, and fixed-income markets lost much of the gains made throughout January. However, these movements live on only in memory as (at the time of writing) equity markets are flat for the year following a 5% drawdown, and fixed interest markets are up circa 3% following a 4% rally. Nevertheless, these movements go some way to show that following a particularly poor 2022, fixed income can now provide clients with a degree of downside protection in what could be a period of prolonged volatility.
This communication is designed for informational purposes only and is not intended as investment advice. These investments are not suitable for everyone, and you should obtain expert advice from a professional financial adviser. Please note that the content is based on the author’s opinion at the time of writing/publish date. Our views and opinions regarding certain investment themes and topics can alter over time as the macroeconomic background changes and other industry news is made publicly available, this is not intended as investment advice.
Past performance is not a reliable indicator of future performance. The value of investments and the income derived from them can fall as well as rise, and investors may get back less than they invested.
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IAM 101.3.23
