If 2022 was the year when US equities suffered multiple contractions from monetary tightening, the year 2023 would be the one when earnings downgrades will hit the stock markets if the US recession forecast proves to be accurate. This is now the key issue in world financial markets, said Christopher Wood, global head of equity strategy at Jefferies, in his recent Greed & Fear note. The year 2024, on the other hand, may well will be the year when markets have to deal with the emerging credit problems in the private space.
“The fact that the credit boom in the past cycle was in the private lending area will mean that the lags in monetary policy will prove to be even longer than usual. But that does not mean that there will be no impact from monetary tightening. Rather, in a world where the US enters recession, SVB will be seen as the first hint of the problems to come in private equity,” Wood said.
He said the more the calm is restored following the panic selling of bank stocks in recent days, the more likely the Fed will announce a 25-bps rate hike. If risk-off continues, a pause seemed much more likely.
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On Asia, Wood said if the BoJ failed to move to start normalising monetary policy, it risks a destabilising collapse in the yen. The real return rate on Japanese bank deposits is negative in the extreme while income growth is also negative in real terms.
According to Wood, India remained a much more straightforward long-term story than China which is why 39% of the brokerage’s Asia ex-Japan long-only portfolio, long-term in its focus, invested in India and only 25% in China. But that does not necessarily mean China is uninvestable.
“What is certainly self-evident for the moment is that the recently concluded National People’s Congress (NPC) meeting has sent the clear message that China is committed to restoring healthy growth after the trauma of last year, including support for the residential property sector,” Wood said.
Wood believes that SVB is not a systemic risk for banks because it is such an unusual bank, closely interwind with the private equity echo system. However, where US banks were already facing the risk of an outflow of deposits to higher-yielding government guaranteed money market funds, that risk will have increased further.
Fed Chairman Jerome Powell now finds himself in a bit of a pickle given his recent wannabe Volcker act, according to Wood. “The market has been quick to assume that the SVB debacle has made a 50bp rate hike unlikely in the extreme, with even a 25bp hike at the next FOMC meeting on 22 March now questioned. Still, with the latest CPI data not yet showing a significant slowdown, Powell’s recent hawkish resolve will now be put to test.”
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The Federal Deposit Insurance Corporation (FDIC) extended the guarantee of deposits to all depositors in SVB to the full amount and not only to those up to $250,000, which is meant to be the FDIC insurance limit. This, believes Wood, is the latest example of Uncle Sam bailing out rich people, an approach adopted during the 2008 financial crisis which triggered lingering resentment on the entirely legitimate view that the empirical evidence proved that there was one rule for Main Street and another for Wall Street. This maxim can now be extended to Silicon Valley.
The Fed has set up a new bank term-funding programme where collateral will be valued at par, or 100 cents on the dollar, as opposed to the mark-to-market value of those securities. This move has been designed to ease concerns, triggered by SVB, about the value of assets held to maturity on US banks’ balance sheets. While SVB was a bit of a special case, the Fed’s latest move has further advanced the long-term trend towards the ever escalating socialisation of credit risks, said Wood.