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Stabilized, but still fragile: Our CIO Monthly Special on the banking crisis
Last year we considered a recession likely in 2023. Unfortunately, it looks like we were right about that. The significant interest rate hikes implemented by central banks have now reached the real economy. Inflation is likely to fall even more sharply, and we expect the US labor market to weaken, though up to now it has been very resilient. Rate cuts in the second half of the year are likely.
This "big picture" is currently being overshadowed by two banks that have made big headlines in the past couple of weeks. We would like to go into this crisis in more detail in this edition of the blog. On the one hand we will take a look at the reasons behind the events, and then on the other hand we’ll explore possible consequences.
In this fragile environment, we are sticking to an overall neutral positioning of our portfolio.
Our monthly CIO update analyzes the current market environment and presents the backstories. Presenters are Frank Häusler, Chief Investment Strategist, and Andreas Venditti, Swiss Equities Analyst.
In March, a banking crisis erupted very suddenly and unexpectedly. In both the USA and Switzerland, a well-established institution made the headlines. How did this happen?
First of all, one has to consider the two cases separately, and take a macroeconomic perspective. Because the US Federal Reserve sharply tightened interest rates over the past few months, Treasury bills (short-term government bonds) had become attractive investments again. Many savers reacted by shifting their money out of bank accounts and into these instruments—and this proved fatal for Silicon Valley Bank (SVB). The outflow of client funds forced SVB to sell assets in order to create liquidity. Because the bank itself was heavily invested in long-term government bonds—and these had lost a lot of value as a result of rising interest rates—it had to realize losses. The story comes down to a case of inadequate risk management. In the end, the broadening of the US government's deposit insurance guarantee to all depositors, together with the subsequent takeover of SVB by First Citzens Bank, managed to calm the situation down again relatively quickly.
The Credit Suisse situation is quite different. First, a series of problems, scandals, and financial losses led to a massive loss of confidence in the bank. This was followed by an equally drastic withdrawal of client funds—within a two-week period last fall, almost 100 billion Swiss francs flowed out of CS, and the bank was no longer able to recover from this. It had to be taken over by its competitor UBS. In Switzerland, too, this rescue measure temporarily calmed the markets.
What's next? The situation remains fragile, and it will not be able to bear any further external shocks. One consequence will likely be new banking regulations. It will be interesting to see whether these will take new factors into account, such as social media and mobile banking. At SVB, around 20 percent of the bank’s deposits were apparently withdrawn within a matter of hours. How can such a "digital bank run" be prevented or mitigated in the future?
The current environment also has an influence on our portfolio. While a recession is already causing investors some worries, possible rate cuts would give the stock market a boost. Given the uncertainties, we are taking a cautious stand, with weightings remaining neutral on all major asset classes such as equities, bonds, cash, and commodities. In particular, we favor quality equities—i.e. shares in companies with strong balance sheets— and government bonds that will benefit from interest rate cuts.