The first quarter of this year brought a positive investment return for all investment categories. Global equity investments had the highest (+5%) return. However, the financial markets were also rocked by scandals in the banking sector. Is more turbulence to be expected, and what impact will this have on your investment plans?
Banking Scandals
In the U.S., several regional savings banks ran into trouble. Silicon Valley Bank and Signature Bank went bankrupt, and the share price of First Republic Bank collapsed. The risk management at these banks was poor. This is because less stringent rules apply to small regional banks in the U.S. than to larger banks. Good to know: within the European Union, the same capital requirements apply to banks, regardless of their size.
In Switzerland, which is not a member of the E.U., the centuries-old bank Credit Suisse succumbed to various scandals. To prevent further problems, the regulator forced a takeover of Credit Suisse by their fellow Swiss banking institution, UBS. This resulted in losses in the equity portfolio on positions in these banks. What does this mean for the investment plans?
Because Vive only invests in well-diversified, passively managed equity funds, a single bankruptcy can never have a major influence on returns. The positions held by these funds in a single company are proportional to the total (market) value of that company, the market capitalisation.
Therefore, there is no speculation on more favourable price developments of a single company, compared to other companies. In the equity investments in your investment plans, there was a minute position in Silicon Valley Bank, Signature Bank, First Republic bank, and Credit Suisse. In total 0.09%. The loss incurred from this is approximately 0.08% of the equity investments.
That was very different for the largest pension fund in Sweden: Alecta. Alecta was found to have a multiple of the proportional holding, based on market capitalisation, of Silicon Valley Bank in their portfolio, resulting in major losses. Consequently, the investment director was dismissed as a result of this multi-million loss.
Best fund performance in the first quarter:
Northern Trust World Custom ESG Equity Index Fund +5.05%
Last quarter brought a positive investment return for all investment categories. Equity markets are anticipating a cautiously favourable profit scenario for the business sector.
It is not expected that more unrest will occur. The developments and scandals in the banking sector are isolated incidents and will not trigger a chain reaction like in the credit crisis in 2008.
Interest rate development will mainly be driven by the policy of central banks to curb inflation. The Federal Reserve (FED) of the United States raised interest rates to 4.75% - 5.00% in March 2023, a sharp increase of two percentage points since the end of last year. The European Central Bank (ECB) is also pursuing a policy of interest rate increases. The goal is to turn the inflation increase into an inflation decrease, to the level of the inflation target (around 2%). Investors expect the ECB to succeed in this, because as of the end of March, long-term interest rates are around 2.5%, while short-term interest rates are above 2.8%.
Bringing inflation under control will eventually be positive for the economy because it prevents a wage-price spiral. Such a wage-price spiral can occur when increased wage costs per product are passed on in prices, and the resulting higher prices, in turn, lead to higher wage demands.
The short-term interest rate increases will have an effect on companies financed with short-term external capital, as they will pay higher interest rates. Companies with margins that are too low may run into trouble as a result.
Geopolitical tensions in the world also continue to affect the financial markets. The war in Ukraine is having an impact on the prices of grain and oil. The escalating tension between China and Taiwan makes investors aware of the risks associated with dependencies in the supply chain for computer chips.
Do not let the market disrupt your long-term goals. Consistently sticking to your investment strategy with well-diversified portfolios is the key to success in the long term.
Vive's investment strategies take into account the risks that are acceptable for your plan. Check the app to see how you have set your acceptable risk level for your investment plans. Fluctuations in the financial markets are no reason to adjust your risk. A change in your personal situation may be. If you adjust your acceptable risk level in such a way that your current investment portfolio must be adjusted as a result, Vive will automatically take care of that.
Good to know
Vive's communications are compiled to inform and entertain. The content should not be considered financial advice. Asset management involves risks.