Everything, Everywhere, All at Once
No systemic risk amid swift imposition of regulatory backstops.When it rains, it pours. This saying can be no further from the truth judging from the financial market gyrations in recent days as sentiments swung from panic to hope. Right on the heels of the Silicon Valley Bank debacle came Signature Bank, First Republic Bank, and across the Atlantic, Credit Suisse. The upheaval in global banks triggered swift responses from regulators and the actions taken include:
- United States：To address liquidity concerns, the Fed has implemented a Bank Term Funding Program (BTFP) which allows banks to make loans of up to 1-year maturity under favourable terms. This eliminates the need for banks to raise funding via quick assets disposal. Additionally, major US banks (including JP Morgan and Citi) have also injected USD30b of deposits to First Republic Bank.
- Switzerland：To address the upheaval at Credit Suisse, the Swiss National Bank (SNB) has announced that it will fund the bank with liquidity. Credit Suisse has since announced that it would exercise the option to borrow up to USD54b from the Swiss central bank.
In addition, the largest US private banks, the likes of JP Morgan, Bank of America, Citigroup, and Wells Fargo banded together to deposit USD30b into First Republic Bank – an action that signals their confidence in the country’s banking system.
We believe such moves will prevent systemic risks from developing although sentiments will stay extremely volatile in the near-term as events unfold.
Banking crisis: De-facto monetary tightening for the Fed.The US Federal Reserve was originally expected to hike policy rate by 50 bps in a bid to stem sticky inflation. But with the unfolding banking crisis and by extension, sharp tightening of financial conditions, the Fed is highly expected to tone down its hawkish tone.
Indeed, the recalibration of anticipated Fed policy path by investors saw the US Treasury 2Y yield plunging to 4.16% yesterday and we believe the Fed will be compelled to go for a smaller 25 bps hike at the next policy meeting.
Making the best out of a bad situation: Seek exposure on Big Tech and China Banks.Given ongoing volatility in financial markets, coupled with easing of bond yields, two investment ideas stand out:
1) Positive Big Tech:：Every dog has its day. After the selldown of 2022 on global technology stocks, the sector is now looking ripe for selective exposure again as bond yields retrace. On YTD basis , Big Tech (as proxied by NYSE FANG+ Index ) and US Technology have outperformed global equities by 28.4 %pts and 12.9 %pts respectively . Ride the momentum with exposure to quality plays.
2) Positive China Banks：China banks are, indeed, an oasis of calm in the ongoing banking fiasco given lower correlation with global counterparts. We continue to favour China banks for their attractive dividend yield.
CIO Barbell Strategy: Strong outperformance in times of adversity.Our CIO Barbell Strategy continues to outperform the broader market index (50% equities and 50% bonds) despite ongoing market headwinds. Since 2022, the outperformance stands at 2.4 %pts while on a YTD basis, the outperformance is 1.8 %pts.
Given its unique portfolio construct (with emphasis on quality growth, sustainable income , and high-grade bonds), we believe the strategy is well-poised to navigate upcoming financial markets headwinds.
Figure 1: YTD Big Tech outperformance
Source: Bloomberg, DBS
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