Fixed-income investment platform, Blossom, has provided a commentary on this week’s turbulence in the banking industry and what it might mean for Australian investors.
Christian Baylis, Investment Manager, Blossom, on the unfolding developments in global banking and what they mean for the Australian industry:
SVB (Silicon Valley Bank) has been the catalyst for major disruption in capital markets, with Credit Suisse and other banks caught up in the dislocation. Credit Suisse was susceptible to this disruptive event and is suffering from a crisis in confidence due to poor balance sheet management, risk and compliance failures and a series of management failures.
SVB has pushed Credit Suisse to a forced resolution – and we believe there is no longer an opportunity for it to trade its way out of this. Government assistance will be required and a bailout is imminent.
The impact of this in Australia will be higher funding costs, and higher deposit rates to attract depositors. The most significant benefit will be for mortgage holders, as we expect this to take the wind out of the sales of the RBA.
Bond market liquidity is severely dislocated at the moment – meaning those that are in high quality assets will be rewarded. This represents a silver lining for Blossom and our Fixed Income offerings, with significant opportunities now becoming very apparent and assets being more appropriately priced. This allows us to take advantage of higher overall yields and set up medium-term performance.
Also read: Why Did Silicon Valley Bank Fail?
Australia will be caught in the vortex of what happens offshore – because ultimately we find ourselves in international markets. As the saying goes, the US sneezes and we catch a cold. In practical terms, this will mean lower equity markets and a more restrictive funding environment.
However, we don’t believe this is the beginning of another crisis like the GFC. In fact, it is a different issue altogether. Banks are better placed today than they were back in 2008, but that said, it is all about how people respond to a crisis and this can be difficult to predict. At the moment, the response has been quite dramatic and, while the root cause is reasonably innocuous, the response has been anything but that.
Gaby Rosenberg, co-founder and CEO, Blossom, on what the developments mean for Australian retail investors:
While Australian banks operate under tighter regulations and boast greater strength, Credit Suisse’s struggles will still have consequences here. The situation contributes to market volatility and weakens investor confidence.
Weak banking systems can erode investor confidence and the current market sentiment has led investors to reassess the stability of major financial institutions. In the face of uncertainty, investors often re-evaluate their portfolios and adopt defensive strategies.
Fixed income assets, such as government and corporate bonds, become particularly appealing as they can offer a more secure alternative to equities. We see investors focus on capital preservation and diversification to safeguard themselves during market turbulence.
We remain confident in Blossom Fund’s strategy. Blossom Fund’s distinguishing features include an investment-grade average credit rating for our bond portfolio and JP Morgan as the bond custodian. The Fund is diversified across more than 500 exposures, aiming to protect returns against inflation risk.
In the current climate, the bond market is facing considerable disruption, which benefits those holding high-quality assets like those in Blossom Fund. More accurate pricing of assets enables us to capitalise on higher overall yields and bolster medium-term performance.
With a 100% positive monthly performance since inception and active management by Fortlake Asset Management, we are confident in our strategy and well-prepared to navigate uncertain times.
