When all the good stuff happens at once, it can really hit your wallet where it hurts! You’ve got your friend’s wedding, the school reopening, a family trip, and to top it all off, a Hari Raya celebration! It’s like a financial tornado just blew through your life.
The recent upheaval caused by the collapse of Silicon Valley Bank (SVB), which some consider to be the second-largest bank failure in U.S. history after the downfall of Washington Mutual in 2008, is reminiscent of situations where multiple expenses coincide and managing finances becomes challenging.
What led to the collapse of Silicon Valley Bank and what can be learned from it?
SVB’s collapse has been attributed by many to the Federal Reserve’s aggressive rate-hiking campaign, which was aimed at curbing inflation. However, the root cause of SVB’s failure lies in its business model, which heavily focused on venture capital and technology start-ups. Since these firms had large deposits that were not guaranteed by the Federal Deposit Insurance Corporation (FDIC), SVB faced a mismatch between its short-term depositors who were withdrawing assets and its longer-term assets, mainly U.S. bonds classified as held-to-maturity, which had decreased in value due to rising interest rates. Ultimately, the bank’s lack of a diversified client base and weak risk management contributed to its downfall.
Fortunately, the alarming pace at which SVB collapsed also demonstrates the swift action that U.S. bank regulators are willing to take to prevent contagion in the banking system. Federal Reserve, FDIC and U.S. Treasury announced plans to protect SVB’s depositors. Similarly, President Joe Biden emphasized the stability of the American banking system and outlined his administration’s efforts to manage SVB’s collapse.
The Fed now has an additional significant concern to consider in its fight against inflation – a series of bank collapses.
The dramatic implosion of SVB has caused investors to revise their earlier predictions of a quicker pace of rate hikes by the Federal Reserve to combat inflation. The market is uncertain about the potential contagion effects of the SVB fallout, given the significant decline in U.S. two-year treasury yields, which witnessed the steepest decline of over 100bps in two days since 2008. This recent upheaval has cast uncertainty on the future actions of the Federal Reserve. At the time of writing, the market anticipates a 25bps increase in the interest rates in the next meeting, followed by another 25bps increase in May’s meeting, no change in June’s meeting, and a 25bps reduction in the interest rates in July’s meeting.
Source: CME Fedwatch Tool
The key takeaways: –
- Diversification is the key to investing.
As an individual investor, diversification into various asset classes can help achieve a balanced and diversified portfolio that can potentially provide growth, income, and stability over the long term.
- There is potential risk of overconcentration in a particular sector.
Investors may want to diversify their portfolio across multiple sectors that include both defensive and growth-oriented companies to potentially achieve a balanced and diversified investment strategy. Defensive companies, which are less sensitive to economic cycles, have a history of performing well during economic downturns, while growth-oriented companies tend to perform better during economic expansions.
- Maintain a calm demeanour and implement careful planning and budgeting techniques.
Achieving a balance between enjoying life’s events and managing one’s finances is crucial, whether it be for day-to-day expenses or investment portfolios.
When it comes to enjoying life’s events, such as attending a friend’s wedding or going on a family trip, it is important to do so in a way that does not completely drain one’s financial resources. This means budgeting and planning ahead, as well as finding ways to enjoy these events without overspending.
Similarly, achieving balance is also essential when it comes to investing. A balanced investment portfolio can help individuals achieve their financial goals while managing risk.
In conclusion, despite existing concerns, the equity market currently presents several opportunities for investors. However, it is crucial to exercise caution and carefully select investment options to ensure the best risk-adjusted returns. By taking a vigilant and discerning approach, investors can potentially reap the benefits of the current market opportunities while minimising risks.
Phillip Capital Malaysia offers a wide range of investment portfolios designed to meet your unique investment preferences and financial goals. Please click on the link to learn more or email us at cse.my@phillipcapital.com.my if you require any further information.
Disclaimer:
The information contained herein does not constitute an offer, invitation or solicitation to invest in Phillip Capital Management Sdn Bhd (“PCM”). This article has been reviewed and endorsed by the Executive Director (ED) of PCM. This article has not been reviewed by The Securities Commission Malaysia (SC). No part of this document may be circulated or reproduced without prior permission of PCM. This is not a collective investment scheme / unit trust fund. Any investment product or service offered by PCM is not obligations of, deposits in or guaranteed by PCM. Past performance is not necessarily indicative of future returns. Investments are subject to investment risks, including the possible loss of the principal amount invested. Investors should note that the value of the investment may rise as well as decline. If investors are in any doubt about any feature or nature of the investment, they should consult PCM to obtain further information including on the fees and charges involved before investing or seek other professional advice for their specific investment needs or financial situations. Whilst we have taken all reasonable care to ensure that the information contained in this publication is accurate, it does not guarantee the accuracy or completeness of this publication. Any information, opinion and views contained herein are subject to change without notice. We have not given any consideration to and have not made any investigation on your investment objectives, financial situation or your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any persons acting on such information and advice.
