Equities endured a challenging month. The banking sector was buffeted by contagion from the failure of Silicon Valley Bank (SVB) in the US. SVB, the 16th largest bank in the US, failed after a failure to adequately hedge its interest rate risk led to a run on the bank and liquidity crisis. Contagion from its collapse focused investor attention on other entities perceived to have difficulties and led to the Swiss government brokering the takeover of Credit Suisse by UBS.
March’s performance is disappointing but we do not feel the failure of SVB is a ‘canary in the coalmine’ and that the financial sector poses a systemic risk. Large financial institutions are much better capitalised than at any point in the last 40 years. Bank share prices, however, are likely to remain volatile in the near-term and subject to changes in prevailing sentiment.
In the longer-term, though, the vast majority of the banking sector is well capitalised with excellent liquidity. Although changing depositor behaviour may ultimately impact margins, this is already reflected in valuations. Smaller US regional banks may face more challenges but this is likely to manifest itself in tighter credit conditions in some areas as opposed to wholesale failures.
The global economy meanwhile continued to be resilient. Commentary from portfolio companies was generally positive. Few would classify demand as exceptional, but order books and sentiment are reasonably robust and above where might have been expected. More importantly, earnings forecasts appear to have been cut to a level where in most instances it feels there is more upside than downside risk to current year numbers. Of course, the debate may now move onto 2024 rather than 2023.