The effect of a rising interest rate environment is being felt around the globe. Central Banks have a horrible track record when it comes to managing interest rate tightening and with a lot of lagging indicators it remains unclear as to whether the tightening cycle is (or will) have the desired effect. Like many things in life time will tell.
What we are seeing though are various fallouts from a higher interest rate environment. The one that has been getting a lot of headlines is the collapse of Silicon Valley Bank (SVB).
With the guarantee on their deposits coming from the US this produced some stabilisation but further news such as we saw with Credit Suisse and just last night another liquidity issue with First Republic will continue to spook investors. These factors often play into the thesis that markets are irrational in the short term but weighing machines in the long term. Importantly not one of the managers that we use in our portfolios has a holding in SVB shares.
Whilst nobody can accurately predict the future, it is important to that we recognise that there is a growing feeling of instability around the globe. At times like these quality assets remain key and this is an area that forms part of our portfolio construction thesis. Prudent allocation of your investment capital cantered around your objectives is in our opinion the safest course in any environment.
For anyone that is interested in a deep dive following is an article from Christopher Joye, Coolabah Capital which is the best insight article to the cause and outcomes of the bank that we have seen come across our desks.
“In summary, SVB was unusual because (1) it was 100% dependent on the Silicon Valley tech industry, (2) it did not lend out 57% of its deposits to fund normal loans, but rather put this money into financial markets (mainly RMBS and CMBS), (3) it appeared to take on huge interest rate risk by buying fixed-rate, rather than floating-rate, debt instruments and then did not hedge this risk, and (4) these losses were not deducted from its equity capital because of the regulatory hole.”
The link to Chris’s full article is below if you want a deep analysis
https://www.livewiremarkets.com/wires/why-silicon-valley-bank-died-updated-2
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