Investment Research

March 2023

Issue_154

STRONG FIRST QUARTER IN THE MARKETS - THE TWO FIGURES THAT SHOW CONTINUITY In this issue: Investors were not afraid of the banking crisis – Strong earnings for the first quarter - PAGE 2 How Fed "emptied" banks of liquidity - PAGE 4 Can the banking crisis create conditions the same as 2008? - PAGE 5 What to expect for interest rates in the rest of 2023? - PAGE 6 Stocks: Two signs that the worst may be over PAGE 7

XSpot Wealth Investment Research Team

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WEEKLY REPORT Issue_154  Senior Portfolio Manager

The first quarter of 2023 has come to an end and we have seen the fallout from the Fed's aggressive rate hikes over the previous period. Although most estimated that the immediate consequences would have to do with a recession of the American economy, this has not happened. Instead, once again, what the Fed managed to do with its rate hikes was to shock and collapse the banking industry. It all started on Friday March 10 when SVB Bank also collapsed under the weight of continuous outflows. As it became known later, only ten depositors (companies) made up a large percentage of SVB Bank's total deposits. At the emergency meeting of the Fed, the FDIC (Deposit Guarantee Fund) and the US Treasury Department, it was decided to guarantee the deposits of all American depositors and at the same time another bank, Signature Bank, was closed. At the end of the same week, the banking crisis spread to European territory and the historic investment bank Credit Suisse, was the largest bank default in history. In order to resolve the crisis on the spot, Credit Suisse was taken over by the Swiss UBS over the weekend. Investors continued to liquidate bank stocks and search for the next bank, while at the same time Germany's Deutsche Bank CDS soared. Immediate responses from the bank reassured investors and a few days later the supervisory Authorities identified that the rise in CDS was a speculative move by a single investor.

INVESTORS WERE NOT AFRAID OF THE BANKING CRISIS – STRONG EARNINGS FOR THE FIRST QUARTER

The immediate and concerted actions to contain the banking crisis resulted in creating a sense of security among the investors and the investment sentiment was strengthened further resulting in even greater gains for the stocks. It is indicative that the Nasdaq hit a low on the day SVB Bank and Signature went bankrupt and has since rallied 10%.

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WEEKLY REPORT Issue_154

The first quarter ended with stocks moving steadily higher, avoiding a return to their lows. Most indices have made up much of 2022's lost ground.

Source: Bloomberg

And at the sector level, in the first quarter of 2023, the sectors that are favored by lower interest rates and are considered as growth and long duration assets, recorded significant returns and boosted the indices by giving a significant upward momentum throughout this period.

Source: Bloomberg

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WEEKLY REPORT Issue_154

HOW FED "EMPTIED" BANKS OF LIQUIDITY The rise in interest rates has naturally increased the returns on various alternatives to cash, which until now has been sitting in bank accounts. Banks, as is normal, could not keep up with the rise in interest rates, and so the interest rates on their deposits remained extremely low, and in fact, in order to achieve a better interest rate, it had to be committed for a longer period of time. But when investors were able to invest in money market securities and short-term bonds, such as two-year bonds, which had yields even above 4% even for a short time, deposit accounts began to empty quite quickly, since now everyone can get them through their account. The graphs below are very clear about how rising interest rates started to be a huge problem for banks and gradually led to the collapse of two of them and possibly others if interest rates continue to remain at these levels.

US 2-year bond yield and bank index As two-year yields begin to rise and discount aggressive rate hikes, the banking "downhill" just started.

Source: Bloomberg

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WEEKLY REPORT Issue_154

Money market funds and bank index

Source: Bloomberg

It is clear that after at least a decade, investors found alternatives to zero interest rates and rushed to take advantage of them causing sustainability problems to banks. However, as far as US banks are concerned at least, we expect the outlook to be different towards the end of the year. And for deposits to return to the banks, interest rates will have to come down and investors will have to understand that the stock market has stabilized and will move higher.

CAN THE BANKING CRISIS CREATE CONDITIONS THE SAME AS 2008? What is certain is that the credit suffocation caused by banks not being able to lend to the economy could have an impact on the economy and employment if not addressed immediately.

In our view, the de-escalation of this pressure could only be achieved when the Fed is satisfied that inflation is not going to return to higher levels. If the next inflation figures are extremely positive, a slight easing of banking pressure is expected.

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On whether the banking crisis can lead to a new 2008, the response of J.P. Morgan is enlightening. According to J.P. Morgan, the current banking crisis cannot lead to a repeat of 2008 for three reasons.

01 02 03

The Supervisory Authorities and all the involved parties now have tools to resolve banking crises and in addition the big banks are now stronger. The economy is on a different level this time. Today, corporate and household liquidity is stronger than it was in 2008. Even today, debt repayment is showing no signs of concern. The problem is really smaller. Today the problem was not caused by "bad" loans and complex investment products based on mortgage loans.

WHAT TO EXPECT FOR INTEREST RATES IN THE REST OF 2023? The Fed never misses an opportunity to reiterate that interest rates are not going to be lower, and in fact this week, there were Fed officials who said that interest rate hikes must continue to ensure that inflation will come down for good. It should be recalled again that Powell, during the press conference last November, argued that "we should not crash the economy and then come back as the Fed and save it." The two-year yield curve has an excellent ability to predict the future. As it did so successfully once again during 2021, the same seems to happen this time around. Currently, the yield on the two-year bond is at 4.15% but reached as low as 3.75%.

Source: Bloomberg

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WEEKLY REPORT Issue_154

Additionally, one of the more traditional correlations indicates that interest rates will move lower in the near term. Of course, this path also has strong fluctuations, but as long as there are signs that growth will decrease, interest yields will move towards lower levels.

Source: Bloomberg

STOCKS: TWO SIGNS THAT THE WORST MAY BE OVER Legendary investor Peter Lynch used to say:

Investors lose more money trying to 'guess' the next big market downturn than they do from the market downturn itself

Volatility, uncertainty and fear, we have mentioned again, are part of the investment process. They are part of the process that leads to significant growth in investor wealth in the long term. And for this reason, mental peace is needed during these periods. Because markets are always in a different state than investors. When fear and pessimism prevail, markets rise, when joy and euphoria prevail, they fall. And at this time, all the evidence points to fear and uncertainty.

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WEEKLY REPORT Τεύχος_153 Issue_154

Volatility is the cost one incurs in the short term in order to see one's wealth grow over a ten year time horizon. The stability that one seeks in the short term, and sometimes collects it with a fat interest rate, is the cost of future losses of one's wealth. However, there are two elements that investors should take into account because it is possible that they will be quite behind the developments.

1.

FED: AT UNPRECEDENTED LEVELS OF PANIC – A POSITIVE SIGN FOR THE FUTURE

When central banks decide to open up liquidity to commercial and investment banks and they "withdraw" all the cash every week, then there is panic. And that panic often finds markets at pivotal levels for trend reversals and investors invested in the wrong products.

Source: Bloomberg

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2.

ECONOMIC CONDITIONS: MARKETS LOOK AHEAD, INVESTORS LOOK BACK

When everything is bearish, the markets have already discounted it and don't care if it gets a little more bearish. They appreciate that pessimism will pass and look to the future which will be less pessimistic and more optimistic. And they are quick to discount it. If we turn the above phrase into a statistical science, investors only care about 20% of the bad conditions in the indices and miss 80% of what the markets offer them.

Source: Bloomberg

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Investment Research

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