Markets were roiled over the course of the month, as US Regulators intervened to shut down Silicon Valley Bank (SVB) and Signature Bank (SBNY) due to concerns over their liquidity. SVBs financial health and solvency were in question as consumers withdrew their deposits, causing the bank to suffer losses on the sale of securities to meet the withdrawals. Despite an unsuccessful attempt to raise equity, SVBs shares plummeted, and the bank was ultimately placed in receivership by the Federal Deposit Insurance Corporation (FDIC), making it the second largest bank failure in US history. SVB was unique in that it had a concentrated deposit base of technology companies, and it did not hedge its interest rate risk within its asset book, a critical error in a year like 2022 where the value of government bonds fell sharply. The impact on markets was compounded by Credit Suisse having to be bought by UBS, in a deal brokered by the Swiss authorities, again due to confidence concerns and deposit withdrawals. Both of these incidences point to how raising interest rates tightens financial conditions and can cause things in the financial system to ‘break’. Our view is that in the medium-term banks will become more cautious with their loan books, which could lower potential growth in developed market economies. Despite this, equity markets were reasonably resilient, with global equities in Sterling slightly positive over the month. The US was the strongest performing region, with the UK lagging due to its sector composition. We have moved to become defensive in equity positioning, as our view is that growth concerns will likely continue to materialise as central banks continue their fight against inflation.
Fixed income markets were positive, as markets repriced a lower likelihood of further Federal Reserve rate hikes due to the banking liquidity problems. Within fixed income, our holdings in inflation linked bonds in the UK and the US performed strongly.
Alternatives were slightly weaker over the month; with commercial property falling, however our holding in solar energy production assets were resilient, offering government backed revenue streams in sustainable infrastructure.
Within diversifying assets, holdings in curve steepener trades, which go long and short parts of the yield curve, as well holdings in fixed income relative value strategies performed strongly, as the shape of the yield curve shifted due to growth concerns.