March 30th, 2023
Bank collapses and market uncertainty: why there’s no need to panic about your investments this spring
If you have been paying attention to financial news in recent weeks, you wouldn’t be alone in feeling concerned. The spring of 2023 has been an uncertain time in the world economy, and coupled with the volatility experienced since the Covid-19 pandemic began, many investors are not feeling as confident as they’d like.
Firstly, it is important to address the elephant in the room. The collapse of multiple large banks, including Silicon Valley Bank (SVB), Silvergate Bank, and Signature Bank in the US, and most recently Credit Suisse in Europe, has sparked worrying comparisons with the 2008 financial crash.
Yet whereas 2008 happened largely as a result of systemic failure, in the case of SVB, the US’s 16th largest bank, their downfall happened primarily in light of unhedged ventures on low interest rates that did not pay off. As our investment managers Brooks Macdonald put it, “what we have witnessed over the past few weeks has been first and foremost a liquidity event”.
The circumstances of Silvergate, Signature, and Credit Suisse were largely similar: internal processes and inaccurate forecasting may have contributed more significantly to their failures than widespread banking and investment issues.
Importantly, behind the scenes of these more newsworthy events, prevailing inflationary conditions also forced central banks to announce further rises to interest rates in recent weeks.
As an investor, remember that volatility in the markets is a common occurrence. While media noise might spook you, it could be wise to take a long-term view of your portfolio’s performance, focusing on your lifelong goals rather than short-term market fluctuations.
Read on to find out more factors that affected markets in recent weeks.
Understandably, US economic headlines in recent weeks have been overshadowed by the collapse of SVB.
Since the start of the pandemic, SVB had been buying lots of what are often considered “safe” assets such as US Treasury bonds and government-backed mortgage bonds. As interest rates started to rise sharply, their fixed-interest payments didn’t keep up with rising rates.
In early March, SVB then faced a wave of $42 billion of deposit withdrawal requests. As the bank wasn’t able to raise the cash it needed to cover these requests, regulators were forced to step in and close the bank.
Fears of another banking crisis have led to volatility in US markets, with some economists lowering their forecasts for economic growth this year in light of recent events.
Unlike in the UK, US inflation fell to 6% in February 2023, down from an annual rate of 6.4% in January. While still above target, this inflation rate is distinctly lower than the 9.1% peak witnessed in June 2022.
Despite the uncertainty in the markets, the Fed is still set on tackling inflation. As a result, it raised interest rates by 0.25 percentage points in March. This took the upper limit of US interest rates to 5% – its highest level since 2007.
After hitting a new record high in February 2023, the FTSE 100 saw a subsequent downturn in March. In fact, on 15 March, the index saw its worst day of trading since the start of the Covid-19 pandemic.
Source: London Stock Exchange
Indeed, despite some reassuring factors presented in the spring Budget, and sparked by investor concerns over the state of the global banking sector, the FTSE 100 closed 292.66 points lower – around 3.8% – on its worst day since the pandemic started.
In the Budget, Jeremy Hunt unveiled his “plan for growth”. Announcements centred around increasing older workers’ contributions to the economy, tackling the energy crisis, and encouraging investment.
- Increases to several pension allowances, designed to give further tax-efficient retirement savings opportunities
- The removal of the pensions Lifetime Allowance (LTA) tax charge from 2023/24, with plans to abolish the LTA in a future Finance Bill
- Plans to create a dozen new investment zones that the chancellor says may become “12 potential Canary Wharfs”
- A policy of “full capital expensing”, initially proposed to last until 2026, which will allow firms to claim all investments against their tax bills.
As you may have seen in the news, the UK remains the only country in the G7 major economies that has not recovered its lost output during the Covid-19 pandemic. Nevertheless, it has so far avoided the recession many forecasters predicted.
In fact, after falls across the education, transport and storage, and arts, entertainment and recreation activity sectors in December 2022, the UK economy grew by 0.3% in January – with all these industries rebounding impressively.
On a less positive note, inflation defied contractionary expectations and instead rose again, with the Office for National Statistics (ONS) reporting it grew to 10.4% in the year to February 2023.
This led to the Bank of England increasing the base interest rate for the 11th consecutive time in March, this time to 4.25%.
Recession concerns have continued in the eurozone, with GDP growth revised down to 0.0% in the fourth quarter of 2022.
What’s more, household consumption in Q4 2022 saw the largest decline since the start of the eurozone in 1999, with the exception of during the Covid-19 pandemic – showing the clear toll inflation is taking on families.
Indeed, inflation in the area remains high; it stood at 8.5% in February 2023. This prompted the European Central Bank (ECB) to increase interest rates by 0.5 percentage points in March, pushing the bank’s main rate up to 3.5%, while the rate paid on eurozone bank deposits left at the ECB rose to 3%.
Of course, this is one of the key contributors to the eventual decline of Credit Suisse – and even with a $54 billion lifeline from the Swiss Central Bank, it was not enough to make up for the slump in share prices the bank had been witnessing in recent weeks.
In a similar downturn to UK and US indices, the STOXX 600 index fell in the aftermath of the SVB crisis, and while rebounding slightly in the week following, has seen a further decline after the collapse of Credit Suisse.
As China’s strict Covid-19 lockdowns finally ease, increased consumption has been noted throughout the country. A strong uptick in travel was reported in February 2023, with positive effects of this increase in mobility expected in the hospitality and tourism sectors.
Plus, when compared with the west, inflation in China is steady, growing to 1.8% year-on-year in December 2022, Schroders reports.
Outside China itself, the threat of recession in areas such as the UK, US, and Europe could present opportunities to Asian markets. China’s recovery, coupled with the equity values seen in Asian markets compared with those previously mentioned, could put investments in a more stable position in 2023.
Indeed, the MCSI Asia (excluding Japan) ended February at -6.9% which, compared with its -19.4% loss at the end of 2022, is a significant improvement. The Japan TOPIX saw returns of 0.9% as of February 2023, too, signifying a strong position for Asian markets as a whole while western markets are rocked by bank collapses.
Your portfolio is designed to weather uncertainty – so stay calm while markets fluctuate
As a UK investor, it is important to remain calm while these fluctuations see themselves through.
A diversified portfolio is designed to take a certain level of volatility, and even if your investments have lost value in the short term, they are likely to regain this value in due course. Although past performance is not a reliable indicator of future performance, we know that markets often rebound impressively after significant downturns.
Your long-term investment strategy is more important than short-term changes in the market – but if you are concerned, book a review of your portfolio with your financial planner. We can help you build and sustain a portfolio designed to meet your goals.
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This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.