The US government and the US Federal Reserve initiated their rescue operations when the Silicon Valley Bank (SVB) collapsed as a result of a significant bank run to protect the depositors' money. The other banks, such as Signature Bank and First Republic Bank also began to show signs of instability as we were examining the SVB. And to top it all off, now, the shares of Credit Suisse are also falling after Saudi Arabian supporters ruled out additional aid.
Is the failure of SVB and these other banks a concern for contagion risk or a likely repeat of the 2008 global financial crisis? Does it pose a risk to your equity investment portfolio?
Let's not jump to conclusions. Instead, let me explain how this may not be the 2008 global financial crisis (GFC) and how it will affect your equity portfolio.
The SVB collapse is primarily a reflection of the risks brought on by concentrated deposits, bad risk mitigation, and lax scrutiny. However, other regional banks with similarly concentrated funding models can potentially experience issues if this panic spreads to the depositors of the other banks. But, the current crisis is substantially different from global financial crises, both in breadth and cause. The GFC was primarily the result of a long period of subprime lending, with the larger banking sector carrying bad assets on their balance sheets. As a result, when the housing market crashed, it harmed the larger financial system.
But, this time, the balance sheets are in excellent shape, and the overall financial system is in a much better position in terms of capital buffers and asset types. In that regard, managing the risk of contagion should be easier than managing the GFC.
The risk of contagion is the possibility that financial problems at one or more banks will spread to other banks or the whole financial industry. In other words, it is the financial crash's propensity to spread to other markets and locations.
The bank run on SVB and the other banks seems localised rather than widespread. But, if left unchecked, it might have an effect on the financial industry as well as other parts of the economy.
This is a business problem that could affect some startups, venture capital firms, and a few limited banks. It could also cause uncertainty among investors and banking customers in the short term.
The failure of SVB won't impact Indian banks because they are more protected and regulated thanks to RBI's supervision. Other than that, you might experience a period of intense stock market volatility.
The SVB crisis has cast a shadow over the US banking system. But there is a bright spot: The US Fed may choose to halt its rate-hike cycle, which would support a rally for equity investors as money would start flowing into equities, particularly in better-performing countries like India. Although, be wary as the stock market could continue to be extremely volatile for now.
One thing has been made abundantly clear, time and again: One should always diversify their investments to reduce their risk. Your portfolio's construction is crucial. If you already have a good asset allocation in place—a couple of real estate properties, provident funds, PPFs, deposits, gold, mutual funds, and stocks—that are based on your risk profile and are invested to help you reach your long-term financial objectives, then you don't need to do much. Just check the health of your stock portfolio to see if you have any dud stocks or if you are holding on to quality. You don't need to be concerned about your equity mutual fund portfolio because the fund manager, or if you have a financial advisor to manage it, will advise you on the best course of action.
Check the percentage of your equity portfolio to your overall net worth, and if it is less than 20 percent or 30 percent, don't be concerned unless that is the optimal allocation based on your risk profile. Based on your goals and risk tolerance, you should invest more than 50 percent of your money in the stock market through stocks or mutual funds. So rather than panicking about your lower allocation, you should buy and increase your allocations to benefit from this volatile time.
According to the NSE whitepaper, a 5-year or longer time horizon investor in the NIFTY 50 index has never incurred a loss over the past 19 years since June 1999. Take this into consideration. The NIFTY 50 index has consistently produced annualised returns of more than 15 percent for investment horizons of 7 and 10 years, respectively, for 48 percent and 60 percent of the time.
The market's volatility is a SIP investor's best friend. The only challenge is to ignore the previous one and two years of underperformance. The true champion will be someone who maintains their SIPs and stays invested in this market. You will eventually come out on top. Remember that our country is poised to grow at an unprecedented rate over the next decade and a half, so don't miss out on this explosive growth and stay invested in India's story.
The author is a Chartered Accountant and founder of NRP Capitals.
The thoughts and opinions shared here are of the author.
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