SPW MarketWatch: March 2023

  • Bella Edmunds
  • 06 April 2023
  • 5 mins reading time
Source: FactSet, 1 April 2023. Figures represent monthly total returns for March 2023.

Don’t bank on the banking sector

March saw the shock collapse of Silicon Valley Bank (SVB) and Credit Suisse. Whilst many may not have heard of the former, the latter definitely shook the confidence of investors. Although other banks stepped in to take over operations of both, the risk of contagion to the rest of the banking sector weighed on markets over the month. Major central banks quickly assessed the situation and released statements in attempts to reassure markets, with the Bank of England stating that “the UK banking system was "well capitalised and funded, and remains safe and sound"(1).

What really spooked investors in the case of Credit Suisse was the fact that the Swiss financial regulator allowed certain bond holders to lose the entirety of their investment before holders of the bank’s shares. The traditional pecking order for investors sees bond holders further up the list in the event of a collapse than equity (share) holders.

The bonds that were allowed to be wiped were called “Additional Tier 1 (AT1)” bonds. Tier 1 for company creditors includes equity holders, and bonds are usually classed in higher - ‘safer’ - tiers. The AT1 bondholders will have known their investments were in the same risk category as equities, but are likely to have made the assumption that in the event of collapse, they would be put ahead of shareholders. However, in the small print of their investor documents will have been the caveat that the regulator can determine who loses first from Tier 1, and this is what happened.

In Schroders Personal Wealth (SPW) portfolios we had very limited exposure to SVB, Credit Suisse and AT1 bonds.

Equity markets ignoring recession fears?

Despite initially falling on the aforementioned bank collapses, UK shares rose over the second half of the month. This is despite many market commentators now predicting that the continued raising of interest rates could lead to recessions for the UK, Europe and the US later this year. US shares posted gains in March, with particularly strong returns from technology stocks over the first quarter of 2023.

However, the performance of gold points the other way. Investors typically flock to the precious metal in times of market stress and the notable gain of more than 7% in March suggests that some investors do feel the global economy is on a looser footing.

Looking forward, we believe that the outlook for global growth has improved following the removal of China’s Zero Covid Polices. However, regional recessionary risks in 2023 remain, hence we are taking a cautious approach in portfolios and have maintained our underweight exposure to equities. Within fixed income, we are marginally overweight and are more positive on credit markets (bonds issued by companies) due to attractive yields (the income from bonds). Employment data in the US has proven to be more resilient than expected, but strains in the banking sector from the recent collapses of SVB and Credit Suisse have caused US interest rate expectations to fall. We believe that in this environment, a neutral exposure to global government bonds is appropriate.

(1) BBC, 20 March 2023 UK banking system 'safe' after Credit Suisse rescue - BBC News

Important information

Forecasts of future performance are not a reliable guide to actual results neither is past performance a guide to future returns.

The value of investments and the income from them can fall as well as rise and are not guaranteed. The investor might not get back their initial investment.

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