The collapse of SVB should have limited implications for Asia, although it could influence the Fed’s rate decision in March. It also highlights the risk that the Fed’s rate hiking cycle would ultimately surface fragilities within the global economy, reinforcing our investment teams’ continued focus on quality profits and cashflows.
The collapse of Silicon Valley Bank (SVB), a leading lender for the tech start-up community in the US, and the subsequent closure of New York-based Signature bank have caused a sharp sell-off among the US regional banking stocks. US and European global banks were also affected, albeit to a more limited extent. With SVB’s woes stemming from a USD1.8 bn loss on the sale of a portfolio of securities, investor concerns have risen over the value of banks’ bond portfolios. The impact on Asian markets has been relatively muted.
US banking system. The systemic threat to the US banking system should be limited. The US regulators have responded swiftly to prevent any contagion risks to the US financial system:
The issue with Mark to Market for the held to maturity assets is a liquidity problem, not a solvency one. This mechanism immediately reduces the risk of a bank run where the Federal Reserve Banks are in effect backstopping all deposits in the US banking system by ensuring the liquidity problem is solved.
Furthermore, US banks that have been identified as systemically important financial institutions (SIFIs) have formidable capital buffers. These buffers have shielded them from the declines in the value of their held-to-maturity securities portfolios which have already been reflected on their balance sheets at the end of 2022.
Fed rate decision. The recent market developments have lowered the likelihood of a 50bp rate hike at the 21-22 March FOMC meeting. We believe that the odds are now split between a 25bp hike or a temporary pause. That said, barring any systemic contagion, jobs and inflation data will continue to dominate the Fed’s interest rate decision over the longer term.
Asian banks. It was reported that due to weak loan demand, SVB’s investment portfolio made up 57% of its total assets, a level that was significantly higher than other major US banks. This made it particularly vulnerable to a fall in the value of its securities’ portfolio. With the 20 largest banks in Asia Pacific having an average loan to deposit ratio of 75%1, securities should make up a much smaller share of assets.
Asian tech sector. While there has been some knock-on impact on the US tech sector, the impact on the listed Asian tech sector is likely to be far more modest given the limited reliance on SVB for funding.
We believe that this is a short-term market event which is unlikely to impact our long-term investment process. It should be expected that the Fed’s rate hiking cycle, which started about a year ago, would surface fragilities within the global economy. We had highlighted this risk in our 2023 Market Outlook and our investment teams continue to focus on companies and sectors that produce strong cashflows.
Where will all the Chinese deposits go?
Chinese households are flushed with cash. What will they do with it?
Views from Asia following the recent US and Europe banking sector volatility
Our investment teams share their thoughts on Asian financials, how the different ...
China is back: The implications of China’s accelerated re-opening
15 Mar | Michelle Qi
The Chinese government set a GDP growth target of around 5% at the recent National ...
Investing in Asia through a factor lens
08 Mar | Ben Dunn, CFA
Quantitative investment strategies based on factor investing have been employed in ...
Why invest in Asian equities?
There are many reasons to relook at Asia.
Monthly Highlights - February
Sticky inflation temper rate cut expectations. Meanwhile, Emerging Markets see strong ...
Pockets of opportunities in Asian local bonds
Local buyers have emerged as the dominant participants in Asian local bonds
Emerging Market Debt: Compelling high yields
15 Feb | Guilherme Maciel de Barros
Emerging Market Debt is a very attractive asset class, offering high total returns ...
Resource-rich Asia supports new growth areas
As Asia progresses on its path to achieve sustainable development, opportunities will ...
Unlock the value in Asia’s supply chains
Asia plays a key role in global value chains. Supportive policies and country ...
1As of 30 June 2022. Sample limited to the 20 largest Asia-Pacific banks in S&P Global Market Intelligence by total assets as of 30 June 2022. Loans/deposits ratio is calculated using total net loans and total deposits.
This document is produced by Eastspring Investments (Singapore) Limited and issued in:
The European Economic Area (for professional clients only), the UK (professional clients only) and Switzerland (for qualified investors only) by Eastspring Investments (Luxembourg) S.A., 26, Boulevard Royal, 2449 Luxembourg, Grand-Duchy of Luxembourg, registered with the Registre de Commerce et des Sociétés (Luxembourg), Register No B 173737.
The afore-mentioned entities are hereinafter collectively referred to as Eastspring Investments.
This document is solely for information purposes and does not have any regard to the specific investment objective, financial situation and/or particular needs of any specific persons who may receive this document. This document is not intended as an offer, a solicitation of offer or a recommendation, to deal in shares of securities or any financial instruments. It is a marketing communication and it may not be published, circulated, reproduced or distributed without the prior written consent of Eastspring Investments.
Investment involves risk. Past performance and the predictions, projections, or forecasts on the economy, securities markets or the economic trends of the markets are not necessarily indicative of the future or likely performance of Eastspring Investments or any of the funds managed by Eastspring Investments.
Information herein is believed to be reliable at time of publication. Where lawfully permitted, Eastspring Investments does not warrant its completeness or accuracy and is not responsible for error of facts or opinion nor shall be liable for damages arising out of any person’s reliance upon this information. Any opinion or estimate contained in this document may subject to change without notice.
Eastspring Investments (excluding JV companies) companies are ultimately wholly-owned/indirect subsidiaries/associate of Prudential plc of the United Kingdom. Eastspring Investments companies (including JV’s) and Prudential plc are not affiliated in any manner with Prudential Financial, Inc., a company whose principal place of business is in the United States of America or with Prudential Assurance Company Limited, a subsidiary of M&G plc, a company incorporated in the United Kingdom.