March featured two major bank failures. Given the proximity to the great financial crisis, both investors and central banks were conscious of systematic and escalating risks in the global financial system. Emergency measures to prevent liquidity issues were introduced by the Bank of Canada, Bank of England, European Central Bank, Federal Reserve, and the Swiss National Bank. Effectively these measures reversed in rapid order around three months of quantitative tightening.
In the United States, Silicon Valley Bank found itself on the end of an uninsured deposit bank run. The rising interest rate environment had been shown to be problematic for the lender as business looked to withdraw their deposits in search of better returns. The bank had invested in long dated very low yielding treasuries which suffered mark to market losses. An attempt to raise more equity for the bank spooked the bank’s almost uniquely corporate depositors who, unlike retail depositors, at the time had no central bank guarantee on their assets. This resulted in a run-on deposits.
While in Switzerland, the once mighty Credit Suisse ended the month being sold to arch-rival UBS in an emergency deal brokered by their regulator for only $3.25bn. Since being bailed out by the government in the financial crisis UBS removed their own past failing management, shut down several risky investment bank activities and changed culture. Credit Suisse, who entered the financial crisis with a market capitalisation of over $80bn failed to change their own culture resulting in a succession of scandals and large regulatory fines. Losses produced by the 2021 collapse of highly leveraged hedge funds, Archegos Capital Management which at one stage ran over $31bn of assets, began a steady decline in Credit Suisse’s share price. Rumours of an impending capital raise, which the largest shareholder said publicly that they could not back, saw a continuing downwards spiral resulting in the authorities arranging the rescue deal. This deal controversially saw some holders of debt instruments seeing a total capital loss.
The Global Leaders Fund had zero exposures to these banks, however Global liquidity remains a key driver of equity prices. With this resurgent, March saw positive returns from Global Equities. The FTSE All World Index gained 3.1%. Particularly positive returns were seen from traditional growth equities, and also from larger companies. Global financials generally declined given the risks highlighted in the sector, and depositors moved away from institutions with weaker balance sheets, including the regional banks, towards those with requirements for higher capital ratios.
The Global Leaders Fund gained 3.7%. The best performers held in the month were Alibaba +16.4%, Microsoft +15.6%, Alphabet +15.2%. On the negative side the worst performers were Haliburton -12.7%, JPM -9.1% and Schlumberger -7.7%.
The day after Jack Ma’s reappearance in China, Alibaba informed staff by letter, as reported in the South China Morning Post, that the company would be splitting into six autonomous units, that could undertake separate listings going forwards. This was received positively by the stock market and may help unlock some of the discount to our valuation of the company. Further details have begun to be spelled out to the market, and we understand that the logistics division may be the first to undertake an initial public offering.
With supply catching up and the outlook for demand diminishing with lower economic growth expectation, hydrocarbon prices were weak. Despite the continuing rosy fundamental outlook for the energy services sector, the share prices here also declined. We acknowledge however the impact that sentiment towards the oil sector affects these companies.
Given the two bank failures, financial companies generally saw share prices decline. Depositors began to move from the smaller, less well capitalised institutions towards the larger ones. We took the opportunity within the fund to invest in Charles Schwab, who have been a recipient of such deposits and tend to benefit with higher interest rates. Schwab is a company we have followed closely for some time. While the brokerage services that the company provides were elevated during the COVID pandemic, we believe this is now understood by investors.
A new position was also established in global industrials giant Siemens. Siemens provides the fund with exposure to several secular trends including automation and electrification. Historically the firm was an overcomplicated conglomerate. Structural changes are simplifying the business which we believe will highlight the multiple disparity between the company and similar industrial peers.
The pace of interest rate hikes has been reducing, perhaps in part due to perceived economic fragility but also as inflation expectations are lessened. The response recently to prevent contagion from bank collapses is likely to be viewed positively by equity investors.
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