Points of Interest
- March 2023 proved to be another eventful month with the collapse of the Silicon Valley Bank (SVB), Silvergate Bank, Signature Bank, First Republic Bank and Credit Suisse. The intervention of national governments and agencies has averted concerns of a broader 2008/09 financial crisis.
- Inflation remains elevated and central banks continue to raise interest rates as they seek price stability. The recent market rally suggests investors believe rates are close to peaking and will likely fall later in the year.
- For our Bespoke clients as the news broke of the collapse of SVB and the subsequent domino effect with other bank failures we maintained liquidity. As it became apparent the issues with these banks were idiosyncratic, we committed to trades at much improved levels.
- In our Hardy Managed Portfolios we have been maximum underweight bonds for the last two years due to concern about the return of inflation, but now this is priced in and may be close to its peak we are increasing our exposure to Bonds after a sharp fall in prices.
- After initial positivity going into 2023, the markets have continued to be hampered by an acute focus on geopolitics and monetary policy. Following the collapse of SVB markets have now added in the concern for financial stability. With the reassurance from governments that they will take steps to avoid any banking collapse we expect a short mild recession later in the year, but not a financial systems collapse.
What has happened over the last month…
March 2023 proved to be another eventful month to navigate as echoes of 2008 began to reverberate following the collapse of Silicon Valley Bank (SVB), Silvergate Bank, Signature Bank, First Republic Bank and Credit Suisse. A few weeks have now passed since these events and the evidence points towards idiosyncratic issues being responsible for these banks failings, rather than a broad breakdown in the banking system, which has to date benefited from improved post 2008 risk management and regulation. The intervention of national governments and agencies, as well as discussions of increasing bank deposit insurance have ensured the crisis has been contained for now and has averted the concerns of a broader 2008/09 financial crisis. The result of these bank failures will very likely see increased regulation and tighter lending standards which could be a key catalyst for finally slowing the economy down. After all, Inflation remains elevated and central banks continue to raise interest rates as they seek to achieve price stability. The debate now rages as to how many interest rate hikes are left to come if any given the recent bank failures and anticipated slow down. The market is currently pricing in the expectation that with the likely onset of a recession, interest rates cuts will be made later in the year. Upcoming economic data will help shape those central bank decisions, but for now the recent market rally we have seen, suggests investors believe that rates are close to peaking and will likely fall later in the year.
Market reaction over the last 3 months…
March saw both equity and bond volatility significantly increase at the start of the month then began to subside as the bank crisis simmered down. Overall, markets were mixed through March. The FTSE 100 was down 3.10% over the month and up 1.54% over the 12-month period to 31st March 2023. In sterling terms, the more technology and growth biased US S&P 500 index was up 1.60% over the month and was down 3.16% over the 12-month period to the end of March. The global FTSE All World Equity Index in Sterling terms was down 0.57% over the month of March and down 4.28% over the 12-month period.
How we have been managing Bespoke portfolios through this recent period…
At the beginning of March, just before the news of the collapse of SVB, we sold down half of the MSCI World ETF to bolster up the liquidity of portfolios to prepare for a series of direct equity trades. As the SVB news broke and the dominoes began to fall with other banks failing over the subsequent week or two, we erred on the side of caution and maintained the liquidity, until the dust settled and we could see more clarity on the situation. As it became more apparent that the issues with these particular banks were idiosyncratic, we were more comfortable to commit to the trades at much improved levels. Following a rally in GBP during this period we turned our attention to opportunities in the US, and bought a US listed care home REIT that plays well into our long term demographics theme whilst also paying a healthy 3.5% dividend yield. We also bought a US listed agriculture equipment company that is well placed to benefit from higher demand for more efficient technologically advanced machinery.
At the time of writing, we have a number of trades lined up that we expect to send to the market over the coming weeks; these include a US banking giant, that has seen their share price pull back, despite the exceptional quality of their business. We are also looking at purchasing a US based digital enterprise cloud computing solutions company, that we expect to thrive over the medium to long term as their client companies seek to improve business efficiencies. We are also looking to buy into a technology closed ended trust, that is currently trading at a discount to NAV. We are also looking to bolster up our alternative exposures with the addition of a US small and mid-cap equity long short fund and a global macro trend following fund that focuses on commodities and can take advantage of trending opportunities through the vast spread of commodities.
What have we been doing for clients in our Hardy Managed Portfolios…
We have been maximum underweight Bonds for the last two years on concern about this return of inflation but, now that this is priced in and we may be close to its peak, we are increasing our exposure to Bonds after the sharp fall in prices. In December we introduced a global corporate bond fund with yields of around 6% and this quarter we have bought a UK corporate bond fund with yields of 8-9%. As inflation falls over the rest of the year, we’re locking into these yields and should see some capital growth too.
In order to buy these bonds, we have trimmed our equity exposure – this was done before the mini-panic we saw in mid-March. The reduction was focused on our overweight US equities; we also sold our healthcare fund after its recent recovery and we bought a new global equity fund. This fund invests in quality value companies, such as Consumer Staples and Financials, and trades on an attractive price to earnings multiple of 12x and 3% dividend yield.
In conclusion, after the recent rally in equity markets – for example, the FTSE100 index hitting a record high at 8,000 in mid-February – we felt it was right to bank some profits, although we remain positive on the opportunities in equities and remain overweight.
Final thoughts…
After the initial positivity to 2023, the markets have continued to be hampered by an acute focus on geopolitics and monetary policy. Following the SVB collapse, markets have now added in the concern for financial stability. We continue to monitor the economic data that signals any concerns with financial system. For now, the government has reassured that they will take steps to avoid any banking collapse. In addition, the US Federal Reserve, whilst mandated to pursue ‘economic goals of maximum employment and price stability,’ will also be focused on also ensuring the stability of the financial system. We expect a short and mild recession later in the year but not a financial system collapse. Therefore, we will continue to actively manage portfolios looking to invest in excellent medium to long term opportunities during periods of market turbulence at improved market valuations.
Important Information
This article is for information only and does not constitute advice or recommendation and you should not make any investment decisions based on it. The views and opinions of this article are those of Casterbridge at the time of writing and may change without notice. Any opinions should not be viewed as indicating any guarantee of return from investments managed by Casterbridge nor as advice of any nature. It is important to remember that past performance and the value of an investment, and any income from it, may go down as well as up and the investor may not get back the original amount invested.
