Banking sector woes and your investments

You may have read or heard about the recent collapse of two US banks, and news of similar troubles at a large European bank. This has led to a few ups and downs in financial markets, and you might have noticed a decline in the value of your investments. Here, we provide you with some background as to what’s happened.

Financial markets have been reeling following a series of shocks over the past few weeks. It was prompted by the collapse of Silicon Valley Bank in the US, followed a few days later by Signature Bank New York. Both were regional banks, with concentrated customer bases, and despite moves by US authorities to guarantee all deposits, fears spread across the banking sector.

The following week, a number of large US banks got together to rescue First Republic Bank, with many fearing that it would be next to go. Meanwhile, in Europe, we saw the Swiss central bank offer Credit Suisse, a large Swiss bank, a financial lifeline as it too came under stress. The bank was later bought by its rival, UBS.

Although there are specific reasons for the troubles that each of these companies have faced, it has stoked fears of another banking crisis. It comes at a time when financial markets are already facing a number of headwinds, with central banks such as the US Federal Reserve, raising interest rates in their fight against inflation.

Financial markets don’t like uncertainty. Although Silicon Valley Bank was a regional bank, it was the 16^th largest bank in the US, and its collapse is the biggest failure of a US bank since the Global Financial Crisis in 2008. Having other big names in the limelight, such as Credit Suisse, has only served to heighten investor worries.

Many equity markets have fallen, particularly those with significant exposure to bank stocks, because people are worried that other banks may get into similar trouble. This has seen the share prices of banking companies fall. That said, other areas of the market, such as technology companies, have performed a bit better, helping to offset some of the banking sector’s weakness. Bond markets, which generally act as a safe-haven in times of crisis, have also seen gains.

We don’t think so. Banks are in better shape today than they were back in 2008. For starters, most large banks around the world are subject to greater regulation and stricter capital requirements; rules that were put in place after the Global Financial Crisis. This should stand them in good stead in these challenging times.

In moves to restore market confidence, central banks in both the US and Europe also unveiled new ways to give other banks access to emergency funds, making it easier for them to borrow from them in a crisis. So, the assumption is that the risks to the broader banking sector are low – even if nervousness around this has picked up.

New Zealand’s financial markets tend to take their direction from what’s happening overseas. So, unsurprisingly, the local share market has been up and down too.

New Zealand businesses are likely to have limited exposure to the overseas banks which have failed, and the good news is that those that did should be supported by some of the insurances that were put in place for depositors in those institutions.

In terms of New Zealand’s banks, the Reserve Bank of New Zealand regularly tests their resilience to ensure they have enough capital to withstand severe shocks, and so we are confident they are well placed to continue supporting the local economy.

A number of the banks we’ve mentioned were, or still are, listed on major equity and bond market indices in the US and Europe, and were available for investment into by our funds.

Our investors had exposure to two of these companies; Silicon Valley Bank and Credit Suisse, via our international equity and bond managers. While we appreciate it must be difficult for investors to hear about these types of events, our holdings in these companies was small; less than 0.3 cents of every dollar invested if you’re in one of our multi-asset-class funds, and up to 0.5 cents if you’re in one of our single-asset-class funds.

It underlines the importance we place on diversification of our funds – that is spreading our investments across many different holdings. Having many different investments helps to smooth out the returns for investors, as it means that falls in the values of poor-performing investments can be offset by other better-performing ones. It should also be noted that our funds invest across many different types of investments, such as shares, bonds and property, as well as across different geographic regions and industry sectors.

Importantly, we remain confident in our underlying investment approach. We focus on long-term performance and follow a consistent and disciplined process for managing investments.

It’s clear there’s an elevated level of concern in financial markets at the moment, and we don’t know what surprises may hide around the corner. But what we do know is that it’s not unusual for markets to go up and down when things are a bit uncertain. We expect this to continue until there’s greater clarity around the outlook for financial markets.

As well as the banking sector woes, there are plenty of other things we’re keeping a close eye on. Central banks will be assessing the current situation to decide whether or not to forge ahead with interest rate hikes. On the one hand, they will be keen to get on top of inflation. But recent events have led to a tightening in financial conditions, thereby doing some of the hard work for them, meaning central banks may not need to raise interest rates by as much.

Despite the potential ups and downs, we would urge our investors to remain focused on the long term and avoid making knee-jerk decisions. If you want advice designed around your individual situation, please contact your financial adviser. If you don’t have one, we have a team of qualified ANZ Investment Advisers available to provide expert advice. To talk to one of our team at ANZ, call us on 0800 736 034. It’s easy and it’s free.

For tips on how to deal with market ups and downs, and to find out some of the other ways ANZ Investments looks out for your investments, see Managing market volatility .