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Thursday 16 March 2023
Investment Talks
March 2023 | In our view, the European bank sell-off is mainly driven by profit-taking and a reassessment of recessionary risks, which is not supportive for the profitability of the sector. In the case of a further escalation in this crisis, we expect the majority of the counterparty exposures to be collateralized, so we do not expect material losses from a potential resolution or wind down. The sector is well-capitalized and liquid and we don't see any other specific instances that pose large risks to other banking stocks. It will be important to monitor liquidity and deposit flows for the sector over the coming periods.
01 | Credit Suisse's share price plunged further this week and the cost of insuring the bank's bonds against a default has reached distressed levels. Yet the European banking sector is solid, with measures having been put in place after the great financial crisis to limit contagion risk.
02 | The failure of Silicon Valley Bank and other regional banks in the US, which led to the turbulence now affecting Credit Suisse, can largely be attributed to the sharp increase in rates and the inversion of the yield curve.
03 | We reiterate the need to keep a cautious stance on risk assets at this stage as the vulnerabilities built up in this fast-hiking cycle are starting to materialize. Government bonds have demonstrated their role as a diversifier in this crisis.
Important Information
Unless otherwise stated, all information contained in this document is from Amundi Asset Management US (Amundi US) and is as of March 16, 2023. Diversification does not guarantee a profit or protect against a loss. The views expressed regarding market and economic trends are those of the author and not necessarily Amundi US and are subject to change at any time based on market and other conditions, and there can be no assurance that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, a security recommendation, or as an indication of trading for any Amundi product. This material does not constitute an offer or solicitation to buy or sell any security, fund units or services. Investment involves risks, including market, political, liquidity and currency risks. Past performance is not a guarantee or indicative of future results. Amundi Asset Management US is the US business of the Amundi Asset Management group of companies.
Passive strategies have generally have fared well over the past decade, which has made it easy to forget the long periods during which active managers outpaced passive approaches. The reasons we believe market concentration will decline include (1) a shrinking earnings advantage for the top ten companies, and (2) seemingly unsustainably high valuations. We believe investors may benefit from investing with active managers that thoughtfully select their exposure based on the earnings and valuation profile of each stock.
For most of the last year, savers have been earning a reasonable return in cash. But how long can these compelling cash rates last? Historically, the answer has been: not very long. In every rate hike cycle since the 1970s, the US Federal Reserve has "paused at the peak" federal funds rate for a matter of months, not years, and history suggests the rate cuts could begin soon. Furthermore, once the Fed starts cutting its policy rate, cash rates could move hundreds of basis points lower in a very short period of time. We believe rotating from cash into short-term bonds can help investors reduce this reinvestment risk without taking on the full price volatility inherent in longer-duration fixed income exposures.
Strong fourth-quarter returns reduced US high yield spreads from 403 basis points over Treasuries at the end of the third quarter to 339 basis points at yearend. Generating positive performance with spreads at these levels is much more challenging than at the long-term average spread of 537 basis points since yearend 1996. Of course, positive performance can also potentially be generated from falling Treasury bond yields. The case for falling Treasury yields currently is built on the depth and cadence of Fed rate cuts, which we believe will be a function of decreasing service sector inflation and how much the US economy slows. Additionally, we continue to be concerned about defaults.
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