March Update

What lies beneath?

The events of the past two weeks have seen a meaningful amount of stress within the financial system as the aggressive and sustained global tightening of monetary policy and financial conditions have exposed some cracks. Importantly this has led investors to question the stability of some parts of the financial system that were seen to be stable due to the tighter regulatory environment and higher levels of capital after the global financial crisis.

We have seen a large financial institution in the form of Credit Suisse having an emergency merger with UBS (backed by significant support from the Swiss authorities); the failure of three US regional banks Silicon Valley Bank, Silvergate Bank and Signature Banks; and a funding rescue for a fourth US bank First Republic Bank.?Importantly, the weaknesses bringing about these events have important similarities and differences.

Similarities around the catalysts being:

1. The consequences of the rapid tightening of monetary policy and the sharp rises in interest rates.
2. Concerns for the valuation and quality of assets held on banks’ balance sheets.
3. Concerns around the stability of funding for these institutions (deposit runs driven by the rise in interest rates from monetary tightening and the attractive opportunities for deposits to be invested elsewhere).

Differences across the types of assets being questions that were held by the banks:

1. Highest quality assets (losses on US Treasury portfolios due to the sharp rise in interest rates).
2. Assets that are reasonably held on banks’ balance sheets (commercial real estate loans, where defaults will increase as properties are revalued downwards and owners walk away).
3. Higher volatility assets (exposures to the cryptocurrency industry, the venture capital industry and complex investment bank balance sheets).

This morning we have seen co-ordinated Central Bank action between the US, Japan, Europe, UK, and Switzerland to provide USD swap lines in order to relieve the current USD liquidity squeeze. As the Economist’s Editor in Chief Zanny Minton Beddoes put it recently?‘what we have here is something more than some isolated bad apples!’

Where to from here?

The?Providence Wealth Advisory Group?investment stance has been defensively postured with high levels of diversification and liquidity.?We felt strongly that there would be more ramifications from the sharp tightening in financial conditions and the availability of credit of the last 15 months. In the near term we see the tightening in credit to be exacerbated with US regional banks accounting for 40% of lending for the US financial system. These dynamics will likely result in further volatility, particularly in the private asset classes where the valuation adjustment is only beginning. Our portfolios’ exposure to gold and government bonds have served us well and our cash weightings allow us to be greedy when others are fearful! Within our remit of the preservation and protection of capital, we can see many opportunities for our clients on the horizon including distressed/opportunistic credit, mid cap global equities and activist investment in Japan.

DISCLAIMER: General Advice Only

Providence Wealth Advisory Group (AFSL 245643) has made every effort to ensure that the information in this report is accurate, however its accuracy, reliability or completeness is not guaranteed. This document contains general investment advice only and individuals should refer to their financial advisor as to the appropriateness of the recommendations. No warranty is made to the accuracy or reliability of neither the information contained nor the specific recommendation for the recipient. Accordingly, before acting on any advice contained in this report, you should determine whether the advice is appropriate to your own financial objectives. Providence Wealth Advisory Group, its subsidiaries, affiliates, or employees may have interests in securities or investment opportunities mentioned in this report. Providence Wealth Advisory Group, and its employees, disclaims all liability and responsibility for any direct or indirect loss or damage, which may be suffered by the recipient through relying on anything contained or omitted in this report.