March Insight: Storm in AT1-cup?

We open with a strategy piece by Alastair George, who notes that 2023’s rally in global equities has proved unsustainable in the face of cracks in the US banking system. The weakest link in the financial system during this period of tighter monetary policy has been uncovered. However, the collapse of Silicon Valley Bank (SVB) seems a special case of mismanagement rather than a harbinger of a systemic crisis in the banking system. Furthermore, while Credit Suisse has been forced into the arms of UBS, error-prone management featured more strongly in the market dynamics than actual capital ratios. Although all banks are subject to the risk of depositor flight, the situation is not at all similar to that of 2008, in our view. There is at this time no evidence of widespread hidden losses embedded deep in the banking system. A decade of post-crisis regulation means that Tier 1 capital ratios for systemically important banks are close to double those prevailing at the time of the financial crisis. Central banks are adopting the correct approach of isolating the problem banks and providing liquidity against good collateral. In hindsight, SVB’s collapse may be seen as a trigger for the peak in US interest rates, which are now expected to fall by 140bp by the end of 2024 from current levels. Long-term bond yields have shifted lower, which, if sustained, will provide valuation relief to asset prices. This faux-banking crisis may yet come be seen as the perfect storm in a teacup, as it shifts medium-term expectations for US interest rates lower. However, global consensus earnings estimates for 2023 have continued on a downtrend over the past month. Subdued single-digit earnings forecasts for major markets are unlikely induce investors to aggressively jump back into global equities, leaving a brief rebound rather than a sustained rally our base case. We maintain a neutral outlook on both global equities and global bonds. Global equity valuations at a little above their long-term averages at a time of cyclically low earnings growth offer little directional guidance in an environment of banking stress, even in the absence of a full-blown systemic crisis.

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