Share markets suffered a rocky period in March as a US regional banking crisis rattled investors' nerves before authorities stepped in to assure depositors and restore some calm.
Trouble started at Silvergate Bank, which is heavily connected to the cryptocurrency ecosystem. Rapid interest rate hikes had placed pressure on its corporate customers, increasing the pace of withdrawals and accelerating the default rate of outstanding loans. This forced the bank to liquidate positions in long-term bonds at market prices, resulting in the immediate recognition of losses, ultimately resulting in bankruptcy.
Problems then spread to Silicon Valley Bank, in what was described as the first-ever Twitter-led bank run, and Signature Bank. With markets focused on who would be the next victim, jittery depositors in Europe deserted Credit Suisse who was rescued by fellow Swiss bank UBS in a controversial deal.
A crisis of confidence
The scenes of central banks rushing to the rescue to provide liquidity where needed evoke memories of 2008. Yet these shocks are not on the scale of the Great Financial Crisis. There is still a risk more bank failures or emergencies could unfold, but if they do, we think they are likely to be confined to a small number of minor banks should depositors decide to move en masse to perceived safer banks. It is notable that the Federal Reserve and Bank of England both raised interest rates during the month, despite the issues in the banking sector, demonstrating they are not too concerned.
We can also be confident that the largest, systemically-important banks globally are much better capitalised now than in the mid-2000s, giving them much greater capacity to absorb losses. Plus they have considerable liquidity – cash on hand. Importantly, there appears to be no widespread risky lending to borrowers with poor credit quality to deal with. We are also reassured that policymakers have now shown they have the tools and the willingness to stop contagion where problems flare up.
These events are of course typical of what happens when central banks raise interest rates. The weakest business models, lenders and investment decisions are exposed, and those with heavy or costly borrowing can get into trouble. As Warren Buffett put it, "When the tide goes out you find out who has been swimming naked". Though perhaps the more apt expression when it comes to bank runs is “the only thing to fear is fear itself”, and for Credit Suisse in particular it was a crisis of confidence rather than an obviously vulnerable balance sheet.
Fund lows and highs
Understandably, funds in the financial sector were among the worst performers over the month, although losses were stemmed as confidence was partially restored before the month's end. Volatility spread to riskier and more economically sensitive areas including smaller companies as investors prioritised safety. Many UK funds were particularly exposed to this trend with typically high weightings in financials and in resources stocks, which bore the brunt of falling commodity prices. The oil price is now some 7% lower year to date, signalling the slowing demand that tighter conditions, exacerbated by the banking turmoil, have been exerting on the economy.
It was not all bad news for investors, though. Higher quality bonds provided a refuge from the volatility, decisively breaking the correlation with share markets that broadsided many traditionally balanced portfolios over 2022. This welcome effect of diversification came about as investors anticipated that increasingly constrictive economic conditions will result in subsiding inflation and a lower trajectory for interest rates. However, in the UK there is a mixed picture on that front with the surprise revelation that, after three months of declines, UK inflation jumped to 10.4% in February, giving the Bank of England every reason to increase interest rates for an 11th consecutive time to 4.25%.
It was also a good month for gold, frequently a financial teddy bear investors cling to in times of crisis. Bullion is now up 9% year to date and has proven a good diversification tool during a volatile first quarter of 2023. There was also investor demand for many of the US tech giants whose quality and resilience stood out as a safe haven for investors fleeing perceived riskier areas. The US Nasdaq index of technology and growth companies is up 19% year to date, though UK investors won’t have felt the full effect as the pound has strengthened against the US dollar over the course of the year so far.
Although investors should be aware past performance is not a reliable indicator of future results, here are the top and bottom ten Investment Association (IA) funds and sectors* for March 2023 in full:
Top 10 funds:
Bottom 10 funds:
Top 10 sectors:
Bottom 10 sectors:
The value of investments can fall as well as rise. Investors may get back less than invested. Past performance is not a reliable guide to future returns. Figures are shown on a % total return basis, bid to bid price with net income reinvested; Source: FE Analytics, data for March 2023: 28/02/2023 to 31/03/2023. Onshore and retail open-ended funds only.
*There are several thousand funds on sale in the UK. The Investment Association divides these into 45 sectors, broad groupings that help investors and advisers compare funds of similar types before looking in detail at individual funds.
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