The Point

Why the Silicon Valley Bank collapse happened and what it means for investors

Cockroach theory refers to the belief that problems affecting one company may indicate similar problems with other similar companies.

After the collapse of California’s Silicon Valley Bank (SVB), the market and the media are on the lookout for more cockroaches.

The good news is that SVB was an unusual cockroach. There could be other lending institutions with similar red flags, but the bank’s problems were largely self-made.

The SVB episode highlights a number of broader risks, which our head of income strategies Amy Xie Patrick outlines here.

But the failure also reinforces the investment views of our income and fixed interest team

“The SVB collapse highlights the need to hold a true-to-label fixed income allocation in your portfolios – if only for insurance,” Amy says.

“Since the third quarter of 2021, we have held a defensive stance in our credit and income portfolios, favouring quality and liquidity over stretching for that extra bit of yield or spread.”

Crispin Murray: Four issues driving the economic outlook for Aussie equities

Australian stocks have proven remarkably defensive over the past year, compared to global shares and other asset classes, delivering a 6.5 per cent return in the year to February, says Pendal’s Crispin Murray.

A material decline in shares is unlikely in 2023, says Crispin in his new biannual Beyond The Numbers webinar.

Earnings are on track for 2% growth in 2023 and 1% in 2024, he believes.

“However, if we do get the RBA forced to hike rates far higher than the economy can absorb, and we do get a downturn, then we’re going to see much more material downgrades. But it’s not the scenario we expect.”

Four issues will drive the underlying economic picture for Australian companies, he says:

What’s driving Aussie equities this week

THE odds of a 50bp US rate hike next week increased markedly after hawkish comments by Fed chair Jay Powell – but that didn’t last long.

Powell last week told US Congress that if the data indicated faster tightening was warranted, “we would be prepared to increase the pace of rate hikes”.

Stronger-than-expected data suggested “the ultimate level of interest rates is likely to be higher than previously anticipated”, he said.

The comments drove two-year US Treasury yields above 5% for the first time since 2007.

The spread between two-year and 10-year bond yields inverted to -107bp – the biggest inversion since 1980 when then Fed chair Paul Volcker was trying to kill inflation.

However, all this was reversed after the collapse of Silicon Valley Bank (SVB) late in the week, which saw yields fall.

Tim Hext: Rates are important – but not as much as the Budget

While we all focused on the RBA’s 10th rate rise in a row yesterday, Team Albanese was quietly working on a budget that will deliver hundreds of billions of dollars in spending initiatives and cuts in May.

Monetary policy is in the spotlight 11 times a year, while fiscal policy only has two moments – the annual budget and the mid-year outlook.

But investors would be wise to pay more attention to fiscal policy, says our head of government bonds, Tim Hext.

“Fiscal policy is more likely to determine whether or not Australia is going to have a recession,” says Tim.

“We’ve built a whole system around monetary policy and the wisdom of the independent central bank.

“But fiscal policy doesn’t get enough attention.

“The government spent $250 billion during Covid. Fiscal policy remains the main game for people’s pockets and the economy.

“It explains why the Australian economy is proving more resilient to rate hikes, at least for now.”