What the banking sector turmoil means for tech, monetary, policy, and investors
- The banking crisis has highlighted some of the fragilities in the system and is likely to lead to a tightening of credit conditions
- Monetary policy expectations have significantly adjusted, with interest rates looking closer to their peak
- We remain positive on technology and selected fintech stocks
- Higher credit spreads provide opportunities in fixed income, with bank AT1 securities re-pricing after the Credit Suisse merger and new issuance likely to be limited
Overall recent events reflect the risk of monetary tightening but, for now, do not represent a material systemic risk to global financial stability. Policymakers have moved quickly to support confidence in markets on both sides of the Atlantic.
Markets have experienced a wave of volatility in the wake of the failure of Silicon Valley Bank (SVB) and UBS’s takeover of Credit Suisse. Concerns have understandably risen over the health of the wider banking and technology sectors and some commentators have drawn comparisons to the 2008 financial crisis.
We do not believe that is an accurate assessment. However, the current situation could potentially have an impact on monetary policy, banking system operations, and ultimately economic growth.
Below, four AXA IM experts summarize their views of the current environment.
Chris Iggo, CIO, AXA IM Core
The combination of SVB’s collapse and UBS’s takeover of Credit Suisse has created a great deal of uncertainty over the market and wider economic outlook.
The situation has also raised questions about unintended consequences from monetary policy tightening.
This has highlighted to investors some of the financial fragilities in the system: Risk indicators have risen – credit spreads have widened; we’ve witnessed an increase in interest rate volatility and across bond and equity markets over the past week or so.
On balance, we expect this situation will lead to a general tightening of credit conditions. Banks will face higher costs of funding, and loan growth at the margin will be affected – this will have implications for the economic outlook, which we think has deteriorated because of recent events.
All eyes will be on the Federal Reserve (Fed) this week. Certainly, following almost 500 basis points (bp) of tightening, this cycle, compared with previous, periods has been much more aggressive. Markets had priced in a Fed Funds Rate peak of some 5.65%, but today it’s barely pricing in an additional 25bp move. There has been a big readjustment of expectations. The market is now even pricing in rate cuts from the middle of this year. We will see how things settle down over the current round of central bank meetings, but it now looks a lot more likely we are close to the peak of the cycle.
While this swift emergence of financial instability is concerning, we do not believe this is another 2008, which was rooted in poor-quality housing-related assets on bank balance sheets. Fundamentally the events of the past 10 days or so have hit the global economic growth outlook. Certain fixed income strategies – such as short duration credit – should benefit. We think a well-thought-out active, diversified investment approach is the best way to meet the challenges ahead.
Jeremy Gleeson, Head of Investment Team, Equity, AXA IM Core
SVB was an important provider of commercial banking services to the US technology industry. A combination of a slowdown in the tech sector and reduced venture capital investment in start-ups meant that SVB’s customers were burning through their money and needed to withdraw their deposits from the bank, which sounded the death knell for SVB.
The wider technology sector has been quite resilient in the past few weeks. Many listed companies have confirmed that their exposure to banks that have experienced financial difficulties is largely de minimis. Thanks to the quick reactions we have seen from the Fed and other institutions in the US to protect and shore up assets, we have not seen a significant impact on tech stocks to date.
The ripples of market shocks will always have the potential to cause problems further down the line. But many of the technology companies we view as most interesting are still growing – just at a slower rate than they enjoyed in 2020 and 2021, when many saw a period of stellar growth as a result of the pandemic.
However, when we see a period of uncertainty anywhere in the economy, it has historically to decision-makers deferring new projects or purchases by a few weeks or months, until there is more clarity.
While this could impact tech companies, an increasing number of businesses, particularly in the software-as-a-service sector, have moved to subscription models over the last decade. This means that even if customers delay signing a new contract, most tech company revenues come from existing customers, so the impact on revenues and cash flow is likely to be fairly small.
We continue to be excited by several technology themes that continue to demonstrate commercial success across software, semiconductors, and the Internet. These areas are well-funded and supported by successful companies able invest even in the face of a bank crisis. We also view the cybersecurity industry as particularly resilient as companies understand they need to continue investing to protect themselves from bad actors – and this is something that we do not expect to change based on the broader economic environment.
Ismael Lecanu - AXA IM Head of Euro Investment Grade and High Yield
The Credit Suisse situation has been a shock for many market participants, particularly around Additional Tier 1 (AT1) bonds. These are generally understood to be riskier, but investors have grown used to debt ranking above equity in moments of market stress like this. It may not feel like it, but in fact, this crisis has proven again that the senior part of the capital structure is well protected.
That said, it has been a good reminder to investors that this asset class is relatively risky, and they should be remunerated for that risk. You can have strict regulation and decent asset quality, but a liquidity crisis can still mean a bank is gone in 24 hours.
We remain exposed to AT1s, diversified across mostly commercial banks rather than investment banks, and we will continue to consider AT1s based on fundamentals and risk. It is likely that any new AT1 issuance will require much more yield, but we don’t expect much new issuance in the coming weeks. The cost right now is too much to come to market, and many banks have the capacity to wait for some stabilization in the market. We think stabilization is likely, but unsurprisingly with some uplift for investors over the yields seen earlier this year.
The large majority of European banks look completely different to Credit Suisse in terms of both operating model and funding model. The Credit Suisse situation looks like an isolated incident; there are also differences between the US and Europe. Our European counterparts are more comfortable with the regulatory oversight, and events of the past week have not shaken this view. The European Central Bank has several tools that should support investor confidence in the banking system.
There is a risk, we think, in potential changes to the macroeconomic environment from this crisis. We will closely watch the next European bank lending survey and banks’ first quarter earnings for evidence of longer-term difficulties and deposit outflows – or for players that may have been able to expand market share during this period.
Key investment takeaways:
- The monetary policy cycle looks like it is set to peak earlier than anticipated with current market pricing suggesting cuts in rates from mid-year in the US and limited further hikes in the Euro area
- Certain fixed income strategies – such as short-duration credit – may benefit. We remain positive on technology and fintech stocks
- We continue to be excited by technology themes such as artificial intelligence and the metaverse, which are well-funded areas supported by successful companies that can invest even in the face of a bank crisis
- We view the cybersecurity industry as particularly resilient as companies understand they need to continue investing to protect themselves from bad actors – and this is something that will not change based on the broader economic environment
- The Credit Suisse situation looks like an isolated incident; there are also differences between the US and Europe. Our European counterparts are more comfortable with the regulatory oversight, and events of the past week have not shaken this view
- This is not a 2008 event as credit quality and capital ratios are much healthier in the global banking system. However, recent events highlight the risks from monetary tightening. Markets are in the process of adjusting to these new risks.
Investment involves risk including the loss of capital.
The information has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. This analysis and conclusions are the expression of an opinion, based on available data at a specific date. Due to the subjective aspect of these analyses, the effective evolution of the economic variables and values of the financial markets could be significantly different for the projections, forecast, anticipations and hypothesis which are communicated in this material.