The collapse of the Silicon Valley Bank in the United States has triggered a crisis in the US and European Banks that may well turn into a contagion. A series of steep rates hikes to combat high inflation has led to re-pricing of bond portfolios as well as ALM mismatch. Systemic risk is difficult to contain without swift interventions by policy makers.
Shares of Credit Suisse in Europe tumbled to an all-time low as the bank admitted to having had material weaknesses in the risk assessment process. According to reports, depositors withdrew a sizeable amount from the bank in the December 2022 quarter. The Swiss National Bank has stepped in to bailout.
Such measures may well avert a cascading crisis but it does lead to panic and uncertainty, as risks remain elevated with regional & small to medium-sized banks in the US and Europe.
The primary worry for markets is about interest rates. While there is no sign of inflation in the western economies declining, there is a good chance that the US Fed may pause/ reduce the intensity of rate hikes. Any potential stress in the banking system could hurt the ability of central banks to rein in inflation.
For you, as an investor, inflation, interest rates and growth dynamics matters. Stock market contagion is a phenomenon where an adverse event in one market can spread to other markets, leading to a widespread decline in stock prices. In Equity markets every such event ultimately leads to opportunities, as the risk reward trade-off starts to turn more favourable.
The other important aspect of investments is that you have to stay disciplined. Just because paranoia is all around, you do not need to press the panic button. Financial markets go through cycles, with opportunities galore during both upward and downward cycles. Stick to your investment strategy and avoid making emotional decisions based on short-term market fluctuations. Remember that market contagion is often temporary and can be followed by a rebound.
Through such ups and downs, contagion or no- contagion, it is important to keep yourself abreast of market risks and manage your investments smartly. At www.alphaniti.com, we help you do that.
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