Bad times ahead?

Are we in for another financial crisis?

Recent Happenings

As I write this blog, Credit Suisse(CS) is undergoing a sale to UBS, where UBS is being pushed by the Swiss Govt & regulatory authorities to undergo this purchase & hoping it would help them avoid a potential financial crisis. The decision to push UBS to rescue Credit Suisse(CS) signifies a reversal of a bailout that UBS received around 15 years ago around the financial crisis when it received a bailout from Switzerland. As per the latest estimate, CS bank is witnessing withdrawals of over $10 billion daily, & are increasing exponentially with every passing day. The sense of nervousness can be felt worldwide & not just in Europe.

Last week, Silicon Valley Bank (SVB), one of the top 20 banks in the USA, collapsed as it faced a bank run. After that, FDIC had to shut down Signature Bank after the bank witnessed a run on its deposits by customers who were spooked by the implosion of SVB. Several more small banks are facing bank runs, the latest one being First Republic Bank. On Thursday, US Treasury Secretary Janet Yellen and Jamie Dimon, the CEO of America’s biggest bank, drew up plans for a private sector rescue by a consortium of JPMorgan Chase, Bank of America & Citigroup along 8 more lenders providing the $30 billion cash infusion aimed at shoring up confidence in First Republic Bank.

Impact

Bank runs are making people lose their faith in the currency issued by governments worldwide. Here are 2 instances to prove it:

1. Gold prices are moving up sharply. Prices are already hovering around a 52-week high of around $2,000/troy ounce.

2. Cryptos are back in the picture. Bitcoin is currently hovering around its 9-month high of ~$27,000+

   

Both Gold & Bitcoin are an alternative to the dollar (or a currency issued by any central bank). If you look at the charts of gold prices along with commodity prices, say copper, you would find a relatively good level of correlation happening between them in the past 1 year which suddenly seems to have broken now with sudden outperformance in Gold prices in the last week. Similarly, Bitcoin seems to have gotten a new life suddenly the in last 1 week, rising ~35% from below the $20,000 mark to $27,000

As more regional and small banks continue to witness deposit withdrawals of billions of dollars, certainly the trust in the financial system is fading at a fast pace in developed markets.

What can we do here in India?

Here are a few points that we believe can work:

1. Stay away from Information Technology: As global markets continue to be under the cloud, it’s better to stay away from the IT sector. Maximum revenues of IT companies like Infosys & TCS come from BFSI (Banking, Financial Services & Insurance) space and the current turmoil in the global banks is the worst news these IT companies can face. Any sign of stability on UBS taking over CS can be short-lived.

2. Prefer high dividend stocks: We think, high dividend paying shares like ITC (currently yielding ~4%) and a few PSUs like Coal India(~10% yield) can be good places to hide for the short to medium term. Recently, the Economic Times came out with news about the government seeking higher dividends from its PSUs to cover the gap it is facing due to missing the targets on the disinvestment side, partly caused by unfavorable markets. This does increases the probability of higher dividend payouts for PSUs in the future.

3. Gold beneficiaries: One can evaluate investing in gold beneficiaries like jewelry makers & gold financers for short to medium-term trades. We have not yet reached the end of the tunnel when it comes to the current banking crisis, we just don’t know when stability/trust returns. Even after the skies are clear, the shine over the gold & bitcoin rally might not stop as they continue to remind the world of the benefit of owning them.

The probability of bank runs spilling into the Indian banking system is low. Our financial system is well regulated by the central bank which has this habit of accessing future risks well in advance. Whether it’s about the mark-to-market rule which caught global attention after the SVB bank’s failure or if its limited participation of Indian banks in supporting riskier equity markets transactions

What about global yields which have been on the rise since the start of 2022? If the financial crisis continues, which means central banks and governments fail to gather the trust of people back in the banking system, the yields would crash as we move into recession or then maybe a depression.

DYOR.

Disclaimers- 

Personal & client investment/interest in the shares exist(as high as 10% of portfolio); this isn’t investment advice; DYOR (do your own research) is recommended; Investing & trading are subject to market risk; the Decision maker is responsible for any outcome