By Henrike Hein, April 20, 2023
March brought the biggest banking collapse since the 2008 financial crisis, caused by central banks raising interest rates to fight inflation.
After the long period of zero interest rate policy, many banks have bonds in their portfolio with correspondingly low interest rates. If interest rates rise, these bonds suddenly lose value and reduce the bank's deposits. If several customers then want their capital at the same time, the the bank must sell these bonds in the event of liquidity bottlenecks. And if necessary even at a loss. If the losses cause trust in the bank to fall, more and more customers want to get their hands on their assets. A downward spiral begins: The banks make losses, share prices fall and the banks slide into insolvency. This is what happened with California's Silicon Valley Bank (SVB) in California and Credit Suisse in Switzerland. To prevent a conflagration and not to endanger even more credit institutions, the systemically important Credit Suisse was taken over by its competitor UBS and SVB was liquidated by the US government.
In addition to economic downturns, high inflation, the Ukraine war, the climate crisis and the aftermath of Corona, a financial crisis would further unsettle markets and exacerbate the current problems. In addition, the two banks show how quickly stock market values can be destroyed. At the beginning of the year, SVB was still listed in various top share overviews, and Credit Suisse's undervaluation was the subject of discussion in various stock market formats. Now their investor:inside are facing a total loss. In addition, the danger has not yet been banished for other banks and asset managers. Many portfolios contain so-called Coco-Bonds from Credit Suisse, which have become virtually worthless. Coco bonds were introduced after the 2008 financial crisis to prevent the the state and taxpayers from having to bail out major banks again. banks. These bonds offer comparatively high interest rates on the capital, but in an emergency the bank can simply wipe them out and declare them lost in order to boost its own balance sheet. The drop in the price of Coco bonds has also affected the value of bonds issued by other banks, thus also influencing various bond ETFs.
However, economists and bank executives do not yet want to see another banking crisis. They are convinced that the institutions are better positioned today, must follow strict rules and have higher equity ratios. Another precautionary measure to protect the general public are these coco bonds, whose extinction is annoying for their investors, but which have at least served their purpose. The old stock market rule applies here: the higher the yield, the higher the risk. The fact that an investment with double-digit interest rates in a zero-interest phase is not a safe investment should have been clear to institutional investors and hedge and pension fund managers in particular. This example shows once again that sustainable investments are preferable to short-term speculative investments. In this context, sustainability does not only mean ecological and social, but also value-retaining and sustainable.
Here, too, well-known wisdom applies. In the long term, waiting and weathering the storm is usually a better strategy than selling at a loss at low prices, regrouping and thus further fueling the turmoil on the stock markets. Those who have taken the rule of a diversified portfolio to heart have a broad spectrum of sectors in their portfolio that can absorb and compensate for the losses of individual stocks. This applies not only to individual stocks, but also to ETFs. Dividend ETFs in particular contain a large proportion of financial sector stocks. How high the share of a sector is in such an ETF is often not entirely clear. For this reason, we focus on the transparency of individual stocks. The composition of our portfolios is broadly diversified and sustainable according to high standards. Through our technology, we are also able to determine the portfolio composition with the lowest risk and highest return probability. This risk management is based on the latest findings in mathematical optimization and takes advantage of artificial intelligence.
In any case, with all stock investments, it is important to invest money that will not be needed in the next few years and serves to. Asset accumulation. This is the only way to ride out fluctuations and compensate for price losses in the long term.