Market Watch: Are global banking woes behind us? Video / NZ Herald
In the wake of last month’s banking collapses in the US and Europe, normal service appears to have resumed on stock markets.
But with interest rates still rising and a recessionary squeeze coming for the global economy we should be prepared for more collapses in the sector, says Pie Fundschief investment office Mike Taylor.
“I think there’s more skeletons in the closet. There always is in these types of scenarios.
“If there are continued challenges in the property sector that will affect banks and their balance sheets and their bad debts, particularly for the US.”
Taylor said he’d expect to see the number of banks failing pick up in the US and the Federal Reserve will have to be actively involved in ensuring stability.
However, despite triggering some bad memories of the Global Financial Crisis in 2008, it was important to keep the situation in perspective.
“You’d be forgiven for feeling a little bit scared during the middle of March, particularly when we started having headlines of large US and European banks collapsing again,” he said.
“It brought back all those memories of 2008, and the very dark days of the deep financial contagion. I think we were all sort of questioning, particularly over weekends, [which] is often when these things tend to unravel - what’s the Fed going to do? What’s the ECB going to do? How they’re going to step in.”
In the end, the fear of contagion didn’t spread to the large US banks but that doesn’t necessarily mean the end of bank failures.
There were 4000 banks in the US and if you looked back across the history post-GFC, there were 100-200 bank failures per year for a couple of years, he said.
Since 2015 it had been relatively low - less than five a year - but regardless, bank failures were not so unusual in the US.
“So you’d definitely expect that the number of banks failing will pick up in the next two years,” Taylor said.
“I don’t think it’s going back to the GFC risk era. Banks are generally better or more capitalised ... now than they were 15 years ago so that part has been improved.”
Mike Taylor, founder and chief executive of Pie Funds. Photo / NZME
But it would be “foolishly optimistic” to think you could go through a 500-point hiking cycle and not have some sort of fallout, he said.
“We all like to believe that the rate hikes are coming to an end.”
The financial market stress of the past had pushed central banks to a more cautious approach.
In Australia, the Reserve Bank had already pushed pause on hikes. There was a case for New Zealand to now do the same, Taylor said.
“We’ve been in an environment for 18 months now where sentiment has felt like it’s bear market.
“Maybe it hasn’t been all the way through, but if you look at the sentiment, that’s what it tells you, and it’s actually longer now than [the negativity].
“Whilst the magnitude is not as large, it’s death by 1000 cuts. It’s quite painful and challenging for investors so hopefully, at some point, we can move past it this year.”
- The Market Watch video show is created in partnership with PIE Funds
