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- Equities: Bank run on SVB triggered broad-based market weakness; no systemic fallout expected
- Credit: Amid fears of rampant risk, high quality, short duration credit minimises exposure to risk
- FX: USD to soften before Fed meeting on 22 Mar; UK budget to underpin GBP within 3-month range
- Rates: Financial stability concerns to outweigh inflation worries for the Fed
- Thematics: Lithium consumption growth in power storage and battery production set to remain strong
No systemic fallout from SVB debacle. Broad-based market weakness amid second largest bank failure in US history. Stocks plummeted last week (ended 10 March) as risk sentiment took a big hit from Silicon Valley Bank’s (SVB) failed equity raise and subsequent bank run on Thursday (9 March). Global equities were down 3.6%, with Developed Markets and Emerging Markets falling 3.6% and 3.3% respectively.
US equities reversed their gains from the week before and notched one of their largest weekly losses of the year. The S&P 500, NASDAQ, and Dow fell 4.6%, 4.7%, and 4.4% respectively. The Dow’s decline was the largest since June 2022. Europe also fell amid the SVB plunge; the FTSE 100 and Stoxx 600 dipped 2.5% and 2.3% for the week. Asian equities were mixed with Hong Kong and China tumbling while Japan equities logged modest gains; HSCEI and Hang Seng were down 7.1% and 6.1%, while Nikkei 225 rose 0.8% for the week.
Topic in focus: No systemic fallout from SVB debacle; seek resilience from quality names. Notwithstanding the sizeable selloff, we believe that SVB’s collapse will not have significant contagion effect on the broader market as the incident was caused by the unique composition of SVB’s balance sheet rather than a systemic liquidity risk. To be specific, SVB held a large proportion of its assets in investments (57%) compared to the average US bank (24%), and it is this outsized exposure to interest rate-sensitive instruments coupled with the lack of hedging measures that contributed to the erosion of its asset base and subsequent need for fundraising. These circumstances were specific to SVB, and its share price performance reflected that; as can be seen in Figure 1, the share price of niche financial companies, including SVB, fell more than large banks such as JPM, Citi, and Wells Fargo.
This incident reinforces our preference for quality as companies with established track records, robust financials, and strong economic moats are better able to withstand market shake-ups. Our strategies to navigate the current environment are as follows:
- Stick with quality for growth equities and favour investment grade credit over high yield
- Gain exposure to alternatives such as gold and private assets to create a holistic and resilient portfolio construct
Figure 1: Major US banks were largely spared from the selloff
Source: Bloomberg, DBS
Topic
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