The UBS/Credit Suisse deal which was announced over the weekend has certainly given investment managers lots to think about this week. Two of RBC Wealth Management’s investment team have shared their thoughts on why they believe this is an idiosyncratic situation in itself, but also why they think there still are knock-on effects to consider for the banking sector more generally commenting:
Commenting on how the UBS/Credit Suisse deal could impact financials in Europe and globally, Thomas McGarrity, head of equities for RBC Wealth Management in the British Isles, said:
“The issues at Credit Suisse are idiosyncratic in nature, which make the systemic risk from this episode relatively low and therefore manageable, in our view. However, we think there are still several important knock-on effects to consider that will have an impact on the outlook for banks stocks. Firstly, the cost of equity has increased for the sector, and we think it is likely to stay elevated reflecting that the risks to the economic outlook have increased, particularly as lending conditions appear likely to tighten further. Banks are very sensitive to credit spreads; if they widen, banks will underperform. Secondly, the recent turmoil could impact central banks’ interest rate path. European bank stocks have been highly correlated to forward rate expectations in 2023, which have fallen sharply over the past week . Thirdly, there’s the prospect of higher funding costs, as banks will perhaps have to pay up more over time for deposits. Fourthly, share buyback plans not yet approved by the regulator may have to be put on hold in the short-term. Fifthly, positioning risk appears elevated, which could add to volatility in the near-term. Offsetting these factors, at least partly in our view, is that valuations have moved sharply lower. Overall, we think it’s important to be selective and remain comfortable owning high-quality bank stocks.”
Commenting on where pressure points are being felt in the market following the UBS/Credit Suisse deal and where he sees things going from here, David Storm, chief investment officer for RBC Wealth Management in the British Isles and Asia, said:
“The biggest pressure point or danger is market participants conflating these events into a 2008 crisis narrative, when we do not view it as that at all. We view it as example, albeit quite extreme, of the dispersion we expect to see across markets. This increases the opportunity set for truly active investors. The second pressure point is investors taking a simple view that this means inflation is no longer a problem, because a recession will take care of that. It’s a very closed-minded view at a time where we continue to see distortions in markets and data caused by the monumental response to covid.
“We are looking for clear signs that these really are idiosyncratic events, which can be compartmentalised. The rapid repricing of interest rate expectations means that the market will be caught out not only if central banks continue to increase rates, but if the Fed does not cut rate.”