Basis Points - Market Update
There have been a number of adverse events concerning foreign banks over the last week, which has given rise to much media commentary, some informed but some not so. Here is a quick summary of what has happened and the impact on your investments.
Diversified Portfolio. Your investments are well diversified and no single investment, such as a single foreign bank, will have a significant impact on the overall value of your portfolio.
Our exposure to Silicon Valley Bank (SVB) and Signature Bank is also very small, up to 0.02%. Depending on which portfolio you are invested in, there will be between 4633 and 7234 underlying holdings diversifying your exposure and preventing a single failure from adversely impacting overall return. If you are in our Bespoke series, you may not be exposed at all.
Inflation Battle. When COVID-19 struck, governments around the world followed a monetary policy of quantitative easing (creating money) and implemented fiscal policies (government spending) designed to support economies as they dealt with the impact of the pandemic. Interest rates were suppressed to historical lows.
These initiatives, in combination with geopolitical events, have led to inflation rates surging around the world. Central banks have been increasing interest rates to slow spending and rein in inflation. The massive and swift increases in interest rates by the US Federal Reserve and other global central banks are now starting to bite – leading to some corporate casualties.
Casualties. The collapse of two regional US Banks (SVB and Signature Bank), combined with ongoing concerns over Credit Suisse may raise some red flags for investors that remember the events of the 2008 Global Financial Crisis (GFC). Unlike during the GFC, these casualties are due to concentration risk and mismanagement rather than a widespread failure of the banking system.
Government Responses. Also separating recent events from the GFC, is the response of central banks which have acted quickly, guaranteeing depositors, and providing liquidity support for these failing banks. This has put some confidence in the market. However, this support does not include senior bond holders or equity holders.
It is inevitable that these events will have downstream implications as confidence has been sorely tested. However, it is important to note, banks today are much better capitalised and hold a lot more cash than they did during the GFC in 2008, and it appears regulators are more alert to the risks of contagion this time round. Therefore, customers and depositors should be relatively comfortable that the banking sector is in much better shape than it was just over a decade ago.
Investment Philosophy. Our investment philosophy is to focus on investing in large, quality stocks with good liquidity, and invest in funds with a sound and diversified investment strategy.
The advantage of our investment philosophy in times like this, is that we remain confident about the overall quality of our portfolio holdings. This minimises concerns about liquidity and the impact of individual holdings (like SVB) on overall portfolio performance.
What’s Next?
Inevitably there will be further headlines about company or bank failures. This is normal, and it is our job to invest to limit any adverse impact on your savings from these normal market events.
Our long-term and goals-based approach to investments means that, unless your personal circumstances or goals have changed, the best course of action is to leave your investment mix unchanged. This can be easier said than done and if you need some help with understanding your personal situation, you can get in touch with one of dedicated financial advisers at [email protected] at no additional cost to you.
Until next time,
Martin & Mack
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