Posted: 13 / 04 / 2023
Article by: Sedulo Wealth
2022 was tough for most investors; with a major conflict in Europe, further lockdowns in China, high inflation, the implications of rising interest rates globally and a growing cost of living crisis.
Most asset classes globally suffered as a result, particularly Bond funds, with only the oil and bank heavy UK FTSE 100 finishing in positive territory. Despite these issues, markets did begin to see a few upturns towards the end of the year, with all major assets on the rise as more positive news on inflation started to filter through.
The prospect of lower inflation by the end of 2023 created some momentum towards the end of 2022 into the new year. However, after a fairly stable period at the beginning of March, we have seen a few events within the global banking system that have caused some concerns. Firstly, we saw the collapse of three “smaller” US banks followed by the failure and purchase of Credit Suisse by UBS in Switzerland. Credit Suisse had seen a considerable reduction in its customer deposits over the last 18 months as interest rates rose and deposit holders sought better returns elsewhere and had one of the weakest balance sheets amongst the so-called systemically important banks (the banks considered ‘too big to fail’).
Banking works on confidence and at no time can even a very conservatively managed bank satisfy all its depositors in the event of mass withdrawals. The banking system in essence is a mechanism for allowing those without capital, who need it, to source it from those with capital who don’t need it right now. Ultimately, regulation in banking exists to promote stability rather than competition since problems can become systemic if left unchecked – a painful lesson learned during the 2008 Financial Crisis. The key to staving off this possibility is to ensure that depositors remain confident in the strength of the banks in which they hold cash. This is very unlike 2008 since, at present, large well-capitalised banks are becoming the beneficiary of deposits away from the smaller banks as large depositors seek safety in large banks, which are subject to more stringent regulations.
Whilst volatility is never pleasant, the agreed strategy based on your specific needs and investment horizon should enable us to weather the storms that come with investment. Volatility is likely to remain in the coming months due to possible further issues in the banking sector, current high inflation as well as the need to be aware of potential “headwinds” such as the worsening of relations between the US and China and of course, what is happening in Ukraine. We continue to take a long-term approach and your portfolio continues to benefit from diversification and we expect some of the more defensive funds to hold their ground as they have done so before.
A well-diversified portfolio continues to be the priority to counteract volatility and attempt to ‘smooth out’ returns.