Market Briefing (no.52) – 31st March 2023

‘The past is a foreign country; they do things differently there’ – did they?

SVB Financial Group, Signature Bank, and Credit Suisse are all financial institutions that have recently experienced different types of issues.

SVB Financial Group, also known as Silicon Valley Bank, specialised in providing banking services to start-ups and technology companies.

Although SVB’s collapse had minimal impact on UK investors, its demise has overtones of th e collapse of Northern Rock in 2007. As the global financial crisis began, Northern Rock experienced a severe liquidity crisis, as it was unable to borrow sufficient funds from other financial institutions to meet its obligations. This led to a ‘bank run’, as customers began to withdraw their deposits en masse, fearing that the bank would collapse.

New York-based Signature Bank has also been in the news. With the collapse of SVB fresh in investors’ minds, there was a similar ‘bank run’ where depositors decided to withdraw a substantial proportion of their deposits leaving US regulators fearing a ‘contagion’ effect in the US banking sector. Whilst a bank failing is not a usual event, especially in the US where there are many smaller banking institutions, SVB and Signature were respectively the largest and second largest failures since 2008, the time of the Global Financial Crisis (GFC).

New York Community Bank agreed to buy a large portion of Signature Bank in a $2.7 billion deal on 19th March. The branches of Signature Bank will be called Flagstar Bank, which is one of New York Community Bank’s subsidiaries. (1) Credit Suisse is a Swiss-based bank that has also been in the news due to its involvement in two separate scandals.

The first scandal involved Archegos Capital Management, a hedge fund that collapsed in March 2021, leading to billi ons of dollars in losses for several banks, including Credit Suisse. Credit Suisse faced criticism for its role in the collapse and for failing to properly manage its risk exposure.

The second scandal involved Greensill Capital, a supply-chain finance company that also collapsed in 2021. Credit Suisse was a major lender to Greensill and is now facing legal action related to the collapse.

These scandals led to significant financial losses for Credit Suisse and resulted in the resignation of several top executives, including the bank’s CEO. Following a government-brokered deal on 19th March, UBS agreed to buyout Credit Suisse for CHF3 billion (£2.66 billion) (2).

With inflation unexpectedly increasing (below image) and UK base interest rates being increased by a further 0.25% , economics closer to home are also causing market anxiety.

On the other hand, some market commentators have said that these changes have been ‘baked in’ to market sentiment.

The past is a foreign country, so things were different then. Were they? Can we learn anything from past economic events?

Emotions or reactions to current events may influence short-term equity prices. However, these will pass and give way to the fundamentals of the under lying companies in the long term. Quality will prevail despite the bumpy short-lived turbulence. Remaining calm, resolute, and avoiding some of the obvious biases is key.
To gain further reassurance, peering into historic market falls and drawing reasonable conclusions may help. Let’s consider some examples.

The Global Financial Crisis – 2008-2009

In the main, the Global Financial Crisis that took place between 2008 and 2009 was caused by poor decision-making, excessive risk taking and greed, predominantly facilitated through mortgage-backed securities created from US subprime residential mortgages.

Heavily invested in these securities, Lehman Brothers announced bankruptcy on 15th September 2008, and on the follow ing day the world’s largest insurance company, AIG (American International Group), also announced it was going bankrupt. This resulted in many investment funds that owned that stock collapsing, taking much of the market down.

Economies across the globe pumped £billions into their economies and central banks. They conducted asset purchases via massive quantitative easing programmes (5) to reassure investors, in an attempt to end any recession and avoid the global economy slipping into a 1930s style depression.

As can be seen by graph 1 (below) the same global equity market (blue line) and t he same multi-asset sector (red line) fell over 20% during the 5 months between May and October of 2008.

But as you will note, towards the end of this period, the recovery had begun. So, what was the long-term impact?

Graph 2 (below) shows the period 1st January 2007 to 13th March 2023. The orange oval shows the Global Financial Crisis (the
same period covered in graph 1). When reviewed over this 16+ year time period, it puts the orange oval period into context; it’s just a blot on the landscape.

The Covid-19 Pandemic – 2020

It’s hard to believe it’s over three years since the world started going into what became known as ‘lockdown’ caused by the Covid-19 coronavirus pandemic.

As graph 3 shows (below), stock markets began to fall during the end of February 2020, finalising their drop by the end of March 2020.
In the main, the crash was fuelled by significant falls in oil prices, and global investor fears about the coronavirus spread and its impact on economic life.

But what does the Covid-19 induced market fall look like over the 16+ year period we’ve been reviewing?

The blue oval in graph 4 (below) shows a steep decline for the end of February and into March 2020, counterbalanced very quickly by a return to strong growth. Once again, it can be seen that there was no significant detrimental impact on the long-term backdrop.

But what about recent events?

Inflation, interest rates & the Ukraine War – 2022 to now

As graph 5 shows (below), although there have been many events that have caused domestic economic uncertainty, including the continuing human tragedy of the War in Ukraine, world stock markets seem generally unaffected.

Although we all remember the infamous Thursday that was 24th February 2022 – the day the war began – approximately 400 days later, world equity markets have actually increased.

It is important to remember that markets weren’t originally negatively impacted by the war; in fact, in the month immediately following, global markets here represented by the blue line, rose.

Graph 5 above starts just under a week before the war started. As can be seen, global markets fell during that week. Although the threat of war was uncertain at that time, its threat was hanging over global markets, with inflation spiking in readiness for Russian energy being withdrawn, impacting most goods and services. In turn, there was – and continues to be – a stream of interest rate rises across all major Western economies. So although the ‘cost of living’ crisis has impacted many family budgets, in terms of global equity markets, although volatile, returns have been flat as opposed to falling.

Although global markets haven’ t fallen, what do these volati le markets look like over the 16+ year period we’ve been reviewing?
The pink oval in graph 6 (below) shows the volatility over this period. Once again however, there are no significant impacts on the long-term scene.

What should this tell you?

As the famous regulatory warning states, ‘past performance is not a reliable guide to the future’; we do not know what will happen in the near term.

 

So, how should investors react?

Any action driven by understandable strong emotions is highly likely to be detrimental to investors’ long-term objectives, as the examples in all the graphs clearly illustrate.

As we have just said, it’s important to remember that ‘past performance is not a guide to future returns’, no matter what statistics and market events are occurring.

It is also important to remember that investors generally should have longer term investment time horizons, that is at least 5 years or more, and savings that can be relied on when the investment is needed, if the market is suffering a drop.

In addition, the above data reviews only certain asset types. Investors should likely be smarter and broader regarding their investment diversification. This could include a wide spread of geographical areas, asset types, styles, and philosophies.

As we have said many times before, we will continue to monitor the current financial situation and keep you notified of any significant changes that are made. Please contact your Foster Denovo Partner if you wish to discuss your financial situation further.

At times like these, it is even more important that you are taking advice on your finances by a qualified and experienced financial planner. If you think any of your friends, family or colleagues would benefit from speaking to us, especially in the current situation, then please introduce them to your Foster Denovo Partner.

Key indicators up to 28th February 2023 

The ‘Key indicators’ shown in the chart above are designed to provide an overview analysis of different asset types, different geographical jurisdictions, and industrial sectors.

The comparison period compares the difference over two 12-month periods. This version compares all key indicators between 31st January 2022 and 31st January 2023, against 28th February 2022 and 28th February 2023. For example, the last entry, World Value Philosophy, rose (by 0.39%) in the 12 months to February 2023 over the 12 months to January 2023; likewise, the first entry, Asia excluding Japan, fell (by -2.89%) over the same period.

They also include statistics that show the changes in inflation, property – both residential and commercial – together with how UK base interest rate and ‘high street’ interest rates change.

This week in history… (7)

Sources

1) https://www.techtarget.com/whatis/feature/Silicon-Valley-Bank-collapse-explained-What-you-need-to-know
2) https://www.cnbc.com/2023/03/19/ubs-agrees-to-buy-credit-suisse-as-regulators-look-to-shore-up-global-banking-system.html
3) https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2023/march-2023
4)ONS Consumer Price Inflation 
5) Quantitative easing (QE) is a form of monetary policy used by central banks as a method of quickly increasing the domestic money supply and spurring economic activity. Quantitative easing usually involves a country’s central bank purchasing longer-term government bonds, as well as other types of assets, such as mortgage-backed securities https://www.investopedia.com/terms/q/quantitative-easing.asp
6) Financial Express Fundinfo
7) https://www.onthisday.com
8) https://www.bowesbrooks.co.uk/why-does-the-tax-year-start-on-6th-april/

Important Information

This publication is marketing material. It is for information purposes only. This statement is for the sole use of the recipient to whom it has been directly delivered by their Foster Denovo Partner and should not be reproduced, copied, or made available to others. The information presented herein is for illustrative purposes only and does not provide sufficient information on which to make an informed investment decision.

This document is not intended and should not be construed as an offer, solicitation, or recommendation to buy or sell any specific investments or participate in any investment (or other) strategy. Potential investors will have sought advice concerning the suitability of any investment from their Foster Denovo Partner. Potential investors should be aware that past performance is not an indication of future performance and the value of investments, and the income derived from them, may fluctuate and they may not receive back the amount they originally invested. The tax treatment of investments depends on each investor’s individual circumstances and is subject to changes in tax legislation.