The ongoing bank tumult on both sides of the Atlantic has reinforced a tightening of financial conditions, making credit risk reappear across the board. This has prompted us to change our investment views while sticking with a risk-off stance: We stay nimble and underweight most equities, downgrade credit to neutral on tighter credit supply for borrowers and prefer very short maturity government bonds for income.
The latest development: an agreement that Swiss bank Credit Suisse would be taken over by a larger rival in a deal that forced punishing losses on its shareholders and some bondholders. The deal has reduced the near term risk of potential contagion. The key now: whether it can halt the deposit flight from Credit Suisse that had added pressure to its longstanding issues. Policymaker measures to stabilise the situation in both the U.S. and Europe have hurt the bank’s shareholders and some bondholders. We think these events should drive up the cost of bank funding, crimping the supply of credit to the economy.
One unusual feature of the Credit Suisse deal was that Additional Tier-1 bonds, or AT1s, were written down to zero even as shareholders received a small payout. AT1s were developed as an asset after the global financial crisis to help buttress bank capital. AT1s typically convert to equity in times of stress and are not expected to suffer larger losses than equity. In this case, the Swiss government backstopped the takeover – and Credit Suisse’s bonds had hard wired into their terms that they would be written down to zero if the bank benefited from government support. Such terms are rare outside Switzerland, so this would not happen elsewhere, in our view. The European Banking Authority confirmed in March that euro area ATIs will not suffer greater losses than shareholders. Yet the write down of Credit Suisse’s AT1s has caused a re-evaluation of their risks. We see issuance costs increasing as a result.
Markets have been quick to price in central banks cutting rates to stabilise the situation. That’s the old playbook and we think it no longer applies. The reason: persistent inflation, as confirmed by the mid March U.S. CPI. We see central banks sticking to a “separation principle” – using balance sheets and other tools to ensure financial stability while keeping monetary policy focused on reining in inflation.
The bottom line: We stay underweight developed market (DM) shares. We cut investment grade credit to neutral and turn underweight high yield bonds given tighter financing conditions. We stay overweight short term government bonds and prefer very short maturities. We upgrade inflation linked bonds to a bigger overweight. We prefer emerging market (EM) assets and add an overweight to local currency bonds to our relative preference for EM equities.
“I have been with Capstone for over three years and have found them refreshing to deal with. They help you become the best version of your business. I can wholeheartedly commend Capstone to any planner.”
Bronson Financial Services
“At a time of industry upheaval, the support of Capstone has been a godsend. Everything they promised they delivered.If you are looking for a new licensee you cannot beat the Capstone service offering."
Canyon Financial Planning
“Capstone Financial Planning should be at the top of your list for a Licensee. Grant and his amazing team give a down to earth and personalised approach to supporting practices.”
“Capstone have some of the highest quality individuals in their team and it’s a pleasure to benefit from their insight and assistance. We really can’t recommend them enough to anyone considering a licensee.”
Strategic Retirement Solutions
“I recommend Capstone to any adviser seeking to 'go out on their own'. They are a fabulous licensee!”
Everalls Wealth Management
“With Capstone I can operate my business free from conflict. They have no in-house products, a flexible APL, and an extensive list of SMA solutions. I recommend Capstone highly.”
“I can highly recommend Capstone for planners seeking an independent licensee that’s not in your face but provide quality support services. Their service and support is second to none and has allowed us to concentrate on providing our clients with a premium level of service.”
“Having been with Capstone for a number of years, one thing that really stands out is their willingness to help and can do attitude. These are qualities we really appreciate.”
“The team at Capstone are all genuinely really good people. They are remarkable with their service culture. They really do care what you think, and they are genuine about our joint success into the longer term.”
Benchmark Financial Planning
“During times of change, it has been reassuring to be with a licensee that regularly engages with advisers and takes feedback seriously.”