Weekly Market Update- Week Ending 17/03/2023

Silicon Valley Bank’s (SVB) collapse last Friday sent tremors across the tech industry over the possible impact it could have on businesses and this week financial markets have been very volatile over the possible contagion within the wider financial sector.

This comes despite US regulators announcing that SVB depositors would be fully repaid as part of emergency funding measures aimed at containing the fallout. In the UK, the Bank of England and the government were involved in a deal which will see the UK arm of the bank sold to HSBC for £1 and client assets secured.

As a bit of background, SVB largely specialised in providing banking services to start-up firms, and nearly half of US venture-backed technology and healthcare companies listed on stock markets last year were/are clients of the bank.

The bank started to come under pressure recently as higher interest rates and a general loss of confidence in the technology sector, made it more difficult for its clients to raise money. With new funds hard to raise, companies started to draw on their deposits with the bank. As rumours about the struggles at the bank circulated within its relatively concentrated client base, money started to be pulled from the bank at an escalating pace.

The bank was forced to sell assets, largely US government bonds to meet these withdrawals. The price of these bonds has been significantly affected by the rise in interest rates over the last 12 months and ultimately the proceeds from the sales were not large enough to stop the bank from failing last Friday.

Investment markets dislike uncertainty and there is not much that is more unsettling than a run on a bank. Despite the news, and the possibility that the situation could develop further in the coming weeks, history tells us that staying the course during periods of volatility, rather than selling once markets have fallen, has proven right in the long term.

Once the dust settles, it could be that the Federal Reserve and other central banks are less inclined to raise interest rates much higher than current levels, which would be considered an overall positive for financial markets (particularly growth-style assets). It is a reminder that using interest rates to control an economy is a relatively blunt instrument and it can result in many unintended consequences.

John Naylor, Chartered FCSI – Head of Investment Committee